The interest spread of non-bank financial institutions (NBFIs) experienced a significant decline of 60% in April compared to the previous month due to an increase in non-performing loans within the sector.
People concerned said when the interest rate spread decreases, it directly impacts the income of the institution. For non-bank financial institutions to operate effectively, it is recommended to maintain a minimum interest spread of 3% to ensure financial stability and sustainability.
The interest rate spread refers to the difference between the interest rate at which banks or NBFIs lend money and the interest rate at which they accept deposits. It represents the gap between the rates paid for obtaining funds and the rates at which they charge borrowers.
According to the central bank data, NBFIs are currently collecting deposits at an average interest rate of 7.83%. However, the interest rate on loans stands at 8.27%. Consequently, the interest rate spread for NBFIs has narrowed down to 0.44%.
In March, they were receiving an interest rate of 8.89% on loans, resulting in an interest rate spread of 1.11%.
However, the interest rate spread has experienced a significant decline despite a slight increase in deposit interest rates. This decline can be attributed to the decrease in loan rates, which has impacted the overall interest rate spread.
Kyser Hamid, managing director and CEO of Bangladesh Finance Ltd, said the average interest rate of bank loans decreases due to the rise in non-performing loans. Consequently, this decline in loan rates leads to a decrease in the interest spread as well.
He explained that there has not been a significant increase in the deposit or lending rates of non-bank financial institutions (NBFIs). In the case of weaker NBFIs, non-performing loans have not decreased, and their cost of deposits has actually risen. Consequently, the interest spread of these institutions has turned negative in several cases.
As per the central bank's data, out of the 30 non-bank financial institutions currently operating in the country, 10 of them have negative interest spreads. People's Leasing and Financial Services, which was severely affected by the PK Halder scam, is experiencing the highest negative interest spread of 11.31%.
Mominul Islam, managing director and CEO of IPDC Finance, said that non-bank financial institutions are currently facing higher interest expenses for loans obtained from banks. As a result, the overall costs for many institutions have increased.
"Additionally, NBFIs are finding it challenging to compete with banks due to the interest rate cap. Despite being in a good position, our interest spread has experienced a decline of 70 basis points in the January-March period of this year compared to the same period last year," he said.
If we face such a situation, the pressure on small and medium NBFIs must be more, he added.
Under the current rules set by the central bank, non-bank financial institutions (NBFIs) are permitted to charge 7% interest on deposits and 11% interest on loans. However, there has been a verbal allowance from the central bank, allowing NBFIs to accept deposits at a maximum interest rate of 8%.
However, NBFIs are not complying with this either. Some 10 NBFIs paid more than 8% interest while collecting deposits last April. People's Leasing and Financial Services is giving the highest 11.40%.
Other NBFIs with high deposit interest rates are Uttara Finance, Prime Finance, Aviva Finance, Fareast Finance, Premier Leasing, Meridian Finance, CVC Finance, Lankan Alliance Finance and LankaBangla Finance. However, several NBFIs reported not getting deposits even with high-interest rates.
Md Golam Sarwar Bhuiyan, managing director of Industrial and Infrastructure Development Finance Company, told The Business Standard, that the banks have now increased the deposit rate. Now if the NBFIs do not raise the deposit rate, they will not get the deposit.