Published: Thursday, March 7, 2013

Foreign banks’ spread widens far beyond limit set by BB

Foreign banks' spread widens far beyond limit set by BB

The interest rate spread in foreign banks remains very high despite the central bank’s persuasion to cut it down to 5 percent within next month.
Foreign banks’ average spread was 8.65 percent at the end of January, which is more than double the state banks’ 4 percent and almost double the local private banks’ 5.26 percent, according to Bangladesh Bank data.
Two top former bosses of the central bank said the BB should act fast to rein in the high spread.
An increase in the spread — the difference between lending and deposit rates — means the banks gave lower interest rates to depositors but charged higher from borrowers.
“BB should show no laxity to the banks that have high spread. It (BB) should impose penalty,” said Mohammed Farashuddin, a former governor of the central bank.
Khandker Ibrahim Khaled, a former deputy governor, said high spread affects businesses as the investors have to borrow at high interest rates.
Both the bankers said international standards allow spread at maximum 4 percent, while the rational figure is 2.5-3 percent globally.
Bankers said the BB has set the ceiling for spread at 5 percent considering inefficiency of the management in the banking industry.
Standard Chartered Bank had 9.4 percent spread in January, which is 9.34 percent for Citibank NA and 8.59 percent for HSBC.
Of the foreign banks, National Bank of Pakistan had the highest spread at 9.86 percent, followed by 9.76 percent in Woori Bank. State Bank of India had the lowest — slightly more than 5 percent — among the foreign banks.
Though 30 local private banks’ average spread was 5.26 percent in January, six of such banks’ spread was well above 6 percent.
Of the six banks, BRAC Bank and Dutch-Bangla Bank had 9.05 percent and 8.3 percent spread respectively. The remaining four banks having more than 6 percent spread are Dhaka, Jamuna, Prime and Uttara.
The average spread at eight state banks was 4.01 percent, the lowest among all. Agrani Bank has the highest spread at 4.96 percent.
Farashuddin said the foreign banks’ fees are also exorbitantly high and their clients are very chosen and numbered. Their default loan is also less than any other banks, he said.
“The BB’s strict supervision should detect the banks having higher spread and take actions against them,” he said.
Terming high spread as a double-edged sword, the former governor said it hurts both depositors and borrowers. The central bank should increase its capacity, including manpower, to deal with the growing challenges in the banking industry, he said.
Khaled blamed the high spread on inefficiency of the management and profit motive of the owners.

He criticised the foreign banks, saying their spread cannot exceed 3.5 percent when they operate outside Bangladesh, but it goes close to double digit here.
“These banks (foreign) make profit at their will. Local private banks give them the chance by maintaining a high spread,” said Khaled.
A chief executive of a foreign bank said their business model pushes the spread up.
“Our business is different from that of the local banks. The number of our clients is very limited. So foreign banks’ spread doesn’t reflect the real scenario of the industry,” said the CEO, asking not to be named.
BB Governor Dr Atiur Rahman at a meeting with top bankers last month warned the banks against the high spread and asked them, especially the foreign ones, to bring it down to 5 percent by March.

sajjad@thedailystar.net