Bangladesh Bank scraps minimum interest rate on deposits

The Bangladesh Bank has scrapped the lower cap on deposit rates to let banks set interests in line with their business policy and collect deposits accordingly.

The Banking Regulations and Policy Department of the central bank issued a circular in this regard on Tuesday (12 December) and sent it to the top executives of the scheduled banks for immediate execution.

In August 2021, the central bank instructed all the scheduled banks not to keep the interest rate of fixed deposits below inflation. The maximum interest rate for disbursement of loans was set at 9%.

But now there is no such limit in terms of loans with the introduction of the market-based interest rate system for loans in July this year.

"Hence, there is no need for a minimum interest rate on deposits as well. Due to this, the instruction of August 8, 2021, has been cancelled," the BB notification said.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard that the rate has become more market driven with the cancellation of the lower limit on deposit interest rate. "As a result of the new decision, banks with better deposit positions will now be able to offer lower interest rates to customers on new deposits. That means, the banks will get more freedom in determining the deposit rate."

Bankers say maintaining a 3% spread between deposit and lending rates is ideal for managing operating costs. Currently, the inflation rate is around 9.5%. Therefore, according to the previous guidance of the central bank, the deposit rate should not be less than 9.5%. On the other hand, banks can now charge a maximum lending rate of 11.47%. If banks follow the central bank's previous guidance, it would not have been possible to maintain a 3% spread. With the central bank lifting the limit on minimum interest rates on deposits, banks will be able to increase the spread, if they choose to do so