Deposit rates rise as banks look for funds

The interest rates on deposits have been rising in recent months as banks look for funds amid liquidity stress.

The weighted average interest rate on deposits stood at 4.29 per cent in January, up from 4.23 per cent a month ago, as per the central bank data. The rate was 4.04 per cent in July last year.

Industry insiders said most banks have raised their deposit rates because the whole sector is now facing fund shortages caused by the foreign exchange crisis and inflationary pressure.

AB Bank offered 7.12 per cent interest on fixed deposit receipts (FDRs) in January, which was 6 per cent in July last year. Bank Asia offered 6.75 per cent that month, up from 5.81 per cent in July 2022.

BRAC Bank offered the highest rate, 7.25 per cent, for FDRs in January, which was 6 per cent in July last year.

Banks are not getting deposits despite offering high interest rates due to inflationary pressure, said Emranul Huq, managing director and chief executive officer (CEO) of Dhaka Bank.

His bank offered 6.33 per cent interest on FDRs in January, up from 5.81 per cent in July last year. He said small depositors are now withdrawing money from banks to cover their living expenses.

Inflation stood at 8.57 per cent in January this year. However, the government aims to keep it within 7.5 per cent in this fiscal year.

People are currently unable to save money because of rising inflation, Emranul said.

Due to the forex crisis, surplus liquidity in the banking sector has been falling in recent months. At the end of January 2023, surplus liquidity stood at Tk 1,37,600 crore, down from Tk 2,11,506 crore in the same month last year.

The central bank in January this year withdrew the minimum deposit rate for banks in its monetary policy. Earlier, this rate was the average of that of three months’ inflation.

The central bank move will increase the deposit rate further, said one of its high officials. He said the rising deposit rates impacted the credit growth of banks.

“When we are collecting deposits at more than 7 per cent interest rate and there are costs of default loans as well as provisioning, how can we disburse loans at 9 per cent?” said Meghna Bank Managing Director and CEO Sohail RK Hussain.

Some Islamic banks recently faced huge cash withdrawal pressure when their loan irregularities came to light, which also created fund shortages in the whole banking sector, industry people said.