BB caps bank interest rate spread at 4% to support industrial growth
The banking sector's average spread between lending and deposit rates has widened to 5.72%, while some banks have been charging spreads as high as 7-9%.
Bangladesh Bank (BB) has directed banks to keep the weighted average spread between deposit and lending rates within 4%, in a move aimed at reducing borrowing costs and boosting industrial growth.
The Banking Regulation and Policy Department (BRPD) issued a circular today (29 June), saying the decision was taken several banks were increasing borrowing costs and constraining investment. The directive takes immediate effect.
According to Bangladesh Bank, the banking sector's average spread between lending and deposit rates has widened to 5.72%, while some banks have been charging spreads as high as 7-9%.
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Business leaders have long argued that such wide spreads have made bank financing more expensive, particularly for productive sectors.
In November 2023, Bangladesh Bank withdrew the earlier 4% spread ceiling as part of reforms linked to the abolition of the SMART (Six-Month Moving Average Rate of Treasury Bills) mechanism in May 2024. Since then, banks have been allowed greater flexibility in pricing loans and deposits, with no specific cap on interest spreads.
In the circular, the central bank said recent observations revealed that many banks were setting lending rates significantly higher than deposit rates, resulting in what it described as "excessive" intermediation spreads.
It said the new ceiling is intended to ensure that interest rates remain at a rational level across sectors, particularly for productive industries.
However, the 4% cap will not apply to credit cards and consumer finance, where lending risks are comparatively higher.
The directive has drawn mixed reactions from bankers and economists.
A managing director of a private commercial bank said the central bank's method of calculating gross spreads does not accurately reflect the realities of individual banks.
He argued that lending and deposit rates should be determined by market conditions rather than regulatory limits.
Economists also remain divided over the effectiveness of the measure. Some warn that capping spreads could discourage lending, particularly to small and medium enterprises (SMEs), which typically carry higher credit risks and borrowing costs than large corporate clients.
Former Bangladesh Bank governor Ahsan H Mansur said imposing a rigid spread ceiling could further weaken already sluggish credit growth and make SME financing more difficult.
Instead of administrative controls, he suggested that reducing non-performing loans would naturally narrow spreads by lowering banks' operating and risk costs.
The central bank's latest intervention underscores its efforts to balance market-based interest rate reforms with the need to ensure affordable financing for businesses amid ongoing economic challenges.
