BB firm on deposit rate instruction

Bangladesh Bank has rejected calls by bankers to roll back its decision on fixing interest rates on deposits.

On Sunday, the central bank asked banks not to set interest rates on fixed-term deposits below the average inflation rate of three months. 

BB affirmed its firm stance in a virtual meeting between Governor Fazle Kabir and chief executive officers (CEOs) of private banks on Wednesday. 

CEOs and managing directors (MDs) of various banks joined the virtual meeting led by Association of Bankers, Bangladesh (ABB) Chairman Ali Reza Iftekhar.

They urged the central bank to review the directive on putting a cap on the interest rate on deposits, saying that it is not realistic to implement considering the country’s present economic situation, said sources who joined the meeting. 

However, the central bank did not heed the call and stood by its decision. 

“We issued the circular after extensive research and study. It is a timely decision,” Md Serajul Islam, BB Executive Director and spokesperson, told The Business Post.

As per the latest circular of BB, the interest rate of term deposits should not be less than that of inflation. “The circular will not be reviewed or relaxed,” said Islam.   

The central bank also warned banks who failed to implement the stimulus packages, saying that they have to disburse the loans under the packages this time, he said.    

On Tuesday, AAB Chairman Ali Reza Iftekhar told the Business Post that the central bank issued the instruction without consulting them.

It is not acceptable to raise the interest rate on deposits in line with the inflation rate while the highest lending rate is 9 per cent, said Iftekhar, the managing director of Eastern bank.

According to BB and the Bangladesh Bureau of Statistics, the weighted average interest rate on deposits stood at 4.13 per cent in June, while the average inflation rate was 5.56 per cent.

The BB notice said interest rates on deposits in the banking sector had been steadily declining. It said most banks offer interest or profit on term deposits lower than the inflation rate. 

“This reduces the purchasing power of small depositors who are dependent on the interest or profit of the deposits held in the bank. As a result, they are suffering,” the central bank said.

Now, most banks offer 2 to 4 per cent interest on fixed deposit receipts (FDRs), which result in a negative real interest rate of 2 to 3 per cent for depositors.