Deposit rates increase drastically. Some banks offer up to 12%

Infographics: TBS

Deposit rates increased up to 12% as some banks facing liquidity crunch are offering aggressive rates, industry insiders have said. Policy rate hikes of up to 8% have also led to an increase in interest rates across the money market, for deposits, loans, and bonds alike.

Bankers said the withdrawal of interest rate spread limit and the lending rate cap allowed banks to offer higher deposit rates, alluring savers to park their money in banks.

Data from the Bangladesh Bank indicates that the deposit growth rate in the banking sector soared to 11.04% in December 2023, marking the highest rate observed in the last 28 months. Notably, in September 2021, amidst the global Covid-19 lockdown and subsequent economic slowdown, the deposit growth rate reached 11.26%.

"A major factor contributing to the increase in deposits is the competitive interest rates being offered by certain Islamic banks, up to 11-12%, despite their maximum investment [lending] rate being capped at 12.43% for February," said a managing director of a private bank, on condition of anonymity.

He told The Business Standard that many Islamic banks are facing a significant liquidity challenge, finding it difficult to meet the mandated Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) set by the central bank. As a result, these banks are compelled to attract deposits by offering high interest rates.

The rate hike has proven a boon for savers, who have endured returns below the inflation rate for over a year, he added.

As of 15 January, five Shariah-based banks had a Tk13,292 crore deficit in their current accounts with the central bank and failed to maintain CRR, amounting to Tk10,476 crore. Because of this failure, they are counting a 9% penalty by the central bank.

As the deposit rate increased, the total deposits within the banking sector surged to Tk16.54 lakh crore in December 2023, marking an increase from Tk14.89 lakh crore recorded a year prior, according to central bank data.

The increase in the central bank's policy rate since the beginning of this fiscal year appears to be bearing fruit, as funds are flowing back into banks — a trend poised to aid in controlling inflation, which has remained above 9% since March last year.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said, "Despite deposit rates trailing behind inflation, depositors are choosing to save amid economic uncertainties. Banks typically engage in robust deposit campaigns towards the end of the year to strengthen their balance sheets."

After the lifting of the single-digit lending rate cap imposed in April 2020, the interest rate on deposits rose to a maximum of 9% in December from 7.5% in June of last year. However, prominent banks continue to offer a maximum deposit rate of 8%, despite the average inflation rate standing at 9.48% in December, central bank data shows.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told TBS that the rise in deposit rates is a consequence of the removal of the lending rate cap, which he views as a positive development for the economy.

"With the increase in policy rates, there has been a corresponding adjustment in all types of rates. Nonetheless, the overall deposit rate remains below the inflation rate," he said, suggesting that to increase deposit rates further, lending rates should also be increased further.

Md Mezbaul Haque, executive director and spokesperson of the Bangladesh Bank, informed TBS that the primary aim of the newly introduced contractionary monetary policy is to redirect people's funds back into banks as a measure to combat inflation.

In its monthly publication "Major Economic Indicators", the Bangladesh Bank credited the increase in savings and time deposits to rising deposit rates and a notable decrease in currency held outside banks by the end of December, identifying these as primary factors.

Mejbaul Haque said, "Our goal is to mitigate inflation. Consequently, the private sector is expected to be impacted as we aim to curtail credit growth and decrease the money supply. However, once inflation is managed effectively, private-sector investment is anticipated to rebound."

Withdrawal of interest rate spread limit, lending rate cap 

The central bank has announced smart rates for lending, lifting the bank lending cap from July 2023. Moreover, the interest rate spread limit was lifted in September. 

Interest rate spread is the interest rate charged by banks on loans to private sector customers minus the interest rate paid by commercial or similar banks for demand, time, or savings deposits.

Bankers said due to these initiatives banks can collect deposits at higher rates.

According to a central bank official, adjustments in lending rates are currently tied to the Six-month Moving Average Rate of Treasury bill (SMART), with banks permitted to add a margin of 3.75% for lending to customers. As of February 2023, the maximum loan rate stands at 12.43%.

The official further explained that previously, the interest rate spread limit was 4%, but now banks have the flexibility to maintain a spread of less than 1% if they choose. This flexibility enables banks to offer higher deposit rates.

Currency outside banks declined by Tk37,053 crore in December from July last year, central bank data shows.

New monetary policy to tighten money supply

The Bangladesh Bank unveiled its monetary policy in January this year for the second half of the current fiscal year, tightening the money supply further to contain inflation at 7.5% by June 2024.

This further tightening is expected to raise deposit rates further, which will benefit depositors to get a positive return on their savings. 

The central bank cut private sector credit growth to 10% from 11% for the current fiscal year. However, this loan growth was less than 10% in the first six months of the current financial year.

Bangladesh Bank data shows that consumer financing registered a negative 0.68% growth in July-September 2023 compared to the preceding April-June quarter when the growth was 8.67%.

The drastic fall in corporate sales — from fast-moving consumer goods to motor vehicles, mobile phone usage, apparel products, footwear, steel, cement, and ceramics, etc. — is also evidence of people consuming less for future savings amid challenging economic conditions in Bangladesh.

Call money rate soars to 12-year high

Although deposits are rising, banks are still grappling with a liquidity crunch and are borrowing between Tk30,000 crore and Tk35,000 crore from the central bank daily, data shows.

The average call money rate, the interest rate at which banks borrow from each other overnight, has surged to 9.60% – marking the highest point in the last 12 years due to recent policy rate hikes by the Bangladesh Bank.

Bangladesh Bank data shows that banks borrowed Tk3,251 crore from the call money market on 28 January. This demand pushed the weighted average rate to a staggering 9.60%, marking the highest since 2013.