Written by The Banking Post
The interest rate spread in Bangladesh’s banking sector fell to a 25-month low in July, signalling mounting stress on profitability as higher deposit costs collided with sluggish lending growth.
According to Bangladesh Bank data, the spread between banks’ weighted average lending and deposit rates narrowed to 5.75 percent in July—down 7 basis points from the previous month.
The spread is a key gauge of banking efficiency and overall financial sector health. Regulators often monitor the indicator closely, as its sharp movement can affect profitability, liquidity, and lending appetite.
Bankers say the latest decline reflects a squeeze from both sides of the balance sheet. “The rate of interest on deposits was higher in July, which helped compress the spread,” said Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank. “But the narrowing of spreads has squeezed banks’ profitability.”
Data shows that the weighted average deposit rate rose by 13 basis points to 6.39 percent in July, while the average lending rate increased more modestly by 6 basis points to 12.14 percent.
Sector-wise, the squeeze was sharper. The spread for agriculture shrank by 16 basis points to 5.30 percent, large industries by 10 basis points to 6.10 percent, services by 8 basis points to 6.50 percent, and SMEs by 5 basis points to 6.13 percent.
Analysts note that until mid-2023, banks were operating under a capped regime that fixed lending rates at 9 percent and deposits at 6 percent, leaving them with a spread of 3 percent. With the cap lifted, spreads widened in FY2024 to 6.03 percent—up from just 2.93 percent in FY2023—but they are now under renewed pressure.
Recent trends, however, hint at some easing. Treasury yields, which act as benchmarks for deposit and lending rates, have been declining since August. Rahman said deposit rates in August and September appeared to be softening in line with this trend.
To ensure more accurate reporting, Bangladesh Bank recently revised its method of calculating spreads, requiring banks and non-bank financial institutions to include interest on loans before they are classified as defaults.
Despite the adjustment, the July figures underline a challenging outlook. With stressed assets mounting, deposit costs staying high, and private credit demand sluggish, profitability remains under strain for the country’s banking industry.
