Banks push deposit returns further below inflation
The rate adjustments follow broader policy shifts, including Bangladesh Bank’s recent decision to cut the policy rate from 10% to 9.50% after nearly two years and enforce interest rate spread caps
Highlights:
- Major banks cut deposit rates by 50–100 basis points
- Deposit returns now trail inflation, reducing savers' purchasing power
- Excess liquidity weak credit demand reduce banks' need for deposits
- Central bank policy rate cut triggered lower lending and deposit rates
- Bankers warn prolonged negative real returns may discourage future savings
- Lower lending and bond yields continue squeezing banks' overall income
Most leading commercial banks have cut deposit interest rates by 50 to 100 basis points from the beginning of August, pushing returns further below inflation as excess liquidity and weak private-sector credit demand reduce the need to attract fresh deposits.
The rate adjustments follow broader policy shifts, including Bangladesh Bank's recent decision to cut the policy rate from 10% to 9.50% after nearly two years and enforce interest rate spread caps. Consequently, banks lowered lending rates as well.
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The move comes at a severe cost to savers. With overall inflation standing at 9.16% in June, the fresh round of rate cuts will drag deposit yields down to 8.50-9%, down from the 9-10.15% range offered through July. As a result, depositors face negative real returns, as interest rates fail to keep pace with rising prices.
According to Bangladesh Bank's latest banking sector update, real deposit interest rates have remained persistently negative. Official data show deposit growth reached 11.41% in May, a performance bankers attribute to previously attractive deposit rates. However, industry leaders warn that reducing deposit rates while inflation remains elevated could eventually discourage savers.
"High deposit rates create massive future liabilities, which is why banks are moving to lower their cost of funds," said a senior executive at a private commercial bank. He added that yields on Treasury bills and government bonds had softened, squeezing banks' margins and reducing the incentive to offer 10% returns on one-year deposits.
Toufic Ahmad Choudhury, former director general of the Bangladesh Institute of Bank Management, questioned the central bank's policy decision.
"The question is why the central bank has decreased the policy rate? It is not a prudent decision anymore. Depositors are not getting real interest rates due to high inflation," he told The Business Standard.
Despite the continued erosion of purchasing power, bankers said depositors are still prioritising the safety of their funds over higher returns, helping deposits remain stable for the time being.
Excess liquidity weakens banks' appetite for deposits
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said lower yields on Treasury bills and bonds, combined with abundant liquidity and healthy deposit growth, had reduced banks' need to offer high deposit rates.
"Currently the interest rates on Treasury bills and bonds are lower than before. Banks have excess liquidity, and deposit growth is good. I think deposit interest rates will fall below the inflation rate," he said.
Mahbubur said the Bangladesh Bank had instructed banks to keep the interest rate spread within 4%, prompting lenders to reduce both deposit and lending rates, although deposit rates would be adjusted first.
Mohammad Ali, managing director of Pubali Bank, said higher deposit rates had previously helped banks attract savings.
"Depositors received attractive deposit rates earlier, and as a result deposit growth reached a satisfactory level. But leading commercial banks now have excess liquidity and weak credit demand. So banks have moved away from offering higher rates to depositors and have already reduced deposit rates," he said.
Another managing director of a commercial bank, speaking on condition of anonymity, said depositors are increasingly choosing financially credible banks rather than chasing higher interest rates. He added that if banks could reduce their funding costs, they would increase investment in Treasury bills and government bonds. However, he noted that weaker banks still needed to offer relatively high deposit rates to attract deposits.
Bangladesh Bank data show surplus liquidity rose to Tk3,27,877 crore in May from Tk2,35,500 crore in the same month of 2025.
Lending income weakens as investment demand slows
Banks' earnings from both lending and government securities have come under pressure as interest rates on Treasury instruments have eased and private-sector borrowing has weakened.
According to bankers, yields on Treasury bills are now below 10%, while Treasury bonds offer slightly above 10%, compared with around 12% previously. Lower returns from government securities have reduced their attractiveness compared with the period of higher yields.
Meanwhile, sluggish private investment has continued to suppress demand for bank credit. Bangladesh Bank data show private-sector credit growth remained below 5% in May 2026, reducing banks' income from lending over an extended period.
Banks' financial statements illustrate a significant shift in their income structure over the past four years. In 2021, the country's 52 major banks generated Tk40,793 crore in total income, with lending contributing 47%, investments 34% and commissions 19%.
By 2025, investment income had become banks' largest source of revenue, accounting for 73% of total income, while net interest income had fallen to 6.8%. Commission income remained broadly unchanged at around 20%.
Banks have increased their investment in Treasury bills and government bonds since late 2023, when yields on those instruments rose sharply, although returns have moderated more recently.
