BB rejects bankers’ demand for lifting deposit rate cap

The Bangladesh Bank has rejected bankers' demand for lifting the minimum interest rate cap on deposits. 

Bankers raised the demand in a meeting with the central bank on Wednesday on its premises. The meeting was presided over by the bank Governor Fazle Kabir.

Md Serajul Islam, executive director of the Bangladesh Bank, said bankers demanded that the decision about the deposit rate cap be reconsidered. But the central bank rejected their demand, and stuck to its decision. 

He said the deposit rate cap was imposed only for the fixed deposit portion of individual depositors. As a result, only 30% of deposits will come under the interest rate cap.

Banks currently give almost zero interest to institutional depositors. As a result, the deposit rate cap will not affect the banks' profit margin, he added. 

On Sunday, the Bangladesh Bank issued a circular, barring banks from lowering deposit rates below the inflation rate.

The inflation rate has been on an upward trend in recent months and stood at 5.56% in June. If banks have to fix deposit rates above inflation, it will give a small return to depositors but push the lending rate up.

The deposit rate cap has annoyed bankers as they think it will hurt banks' profitability severely, making it difficult for them to keep the lending rate at 9%.

The deposit rates came down to 2% to 3%, the lowest level in recent history, and in the case of some banks, it was as low as 1%, it did not affect deposit growth. 

The deposit growth was above 13% to 14% during the pandemic year, according to the central bank data.

Bankers said the lending rate cap already reduced the interest income of banks, the new deposit rate cap will further hit their income. 

Total interest income decreased substantially by 9.4% in the last year whereas the interest expense decreased marginally by 0.8%, according to the financial stability report of the Bangladesh Bank for the year 2020.

On the other hand, non-interest income increased by 24.5% in the last year. 

The banking sector's operating profit declined by 8% and stood at Tk25,610 crore last year, while net profit decreased by 33.2% to Tk4,660 crore during the same time. 

Although total non-interest income increased, the net income decreased mainly due to a reduction in interest income, said the Bangladesh Bank in its financial stability report. 

"Ceiling on the interest rate, an adverse economic situation due to Covid-19 along with the restriction on charging interest on interest accrued during the pandemic period might be some key reasons for such a reduction in interest income of the banks," said the report.