BB caps loan-deposit interest spread at 4%

Bangladesh Bank (BB) has instructed banks to maintain the average gap between loan and deposit interest rates within a specific limit, setting the maximum interest rate spread at 4 percent.

The newly imposed ceiling will be applicable to all types of loans, except for credit cards and consumer credit.

The Banking Regulation and Policy Department (BRPD-1) of the central bank issued a circular in this regard on Monday, sending it to the managing directors and chief executive officers of all banks for immediate execution.

According to the circular, the previous directives regarding the interest rate spread were withdrawn on November 29, 2023, following the introduction of the SMART (Six-Month Moving Average Rate of Treasury Bill) and margin-based interest rate system.

Later, on May 8, 2024, a fully market-driven interest rate mechanism was launched without any regulatory ceiling on the intermediation spread.

However, the central bank noted that several banks have recently been setting interest rates on loans significantly higher than their deposit rates, leading to an abnormal expansion of the weighted average interest rate spread.

This trend has escalated the cost of borrowing for trade, industry, and production sectors, creating a negative impact on overall economic activities and investment.

Against this backdrop, BB issued the new directive to keep borrowing costs logical across various sectors. However, the 4 percent limit will not be applicable to credit card loans and consumer credit, reports UNB.