Bangladesh's banks have started lowering interest rates on deposits, with several lenders cutting rates particularly on long-term deposits amid expectations of a decline in lending rates and growing excess liquidity in the banking sector.
In an unusual development, some banks are now offering higher interest rates on short-term deposits than on long-term deposits. Traditionally, longer-tenure deposits carry higher interest rates because banks generally need to pay more to secure funds for extended periods.
Banking sector insiders said the trend has emerged as the government pushes for lower lending rates and Bangladesh Bank has already reduced its policy interest rate. Banks are anticipating further reductions in lending rates and are therefore beginning to lower deposit rates as well.
Banks are also facing weaker demand for private-sector credit and declining yields on government Treasury bills and bonds. As a result, many lenders are holding substantial excess liquidity.
With fewer opportunities to invest or lend the funds they raise, banks are seeking to contain deposit growth by lowering interest rates. Otherwise, the cost of paying interest on unused deposits increases their overall funding costs.
Long-term deposits lose their advantage: Several financially stronger banks with surplus liquidity and relatively high customer confidence have started reducing rates on long-term deposits. Prime Bank, for example, introduced revised deposit rates from September 1. Its four-month deposit rate for retail customers has been reduced to 8.25% from 8.75%. The six-month rate has been cut to 8% from 8.75%, while rates on seven-month deposits have been reduced from 8.5-9% to 8-8.25%.
The bank has also reduced rates on 91-day and 181-day deposits by between 0.50 and 0.75 percentage points. Similar reductions have been applied to SME and corporate deposits. BRAC Bank has also reduced rates across several deposit products. Its new rates took effect on August 24. The bank is offering 7% on six-month and one-year retail deposits, while two-year deposits also carry a 7% rate. The rate for three-year deposits has been set at 6.5%.
The same rates apply to deposits from SME customers. City Bank, Mutual Trust Bank and several other lenders are also considering similar reductions following the moves by leading banks.
Banks focus on short-term deposits: Tareq Refat Ullah Khan, managing director of BRAC Bank, said banks are trying to adjust their funding costs by lowering deposit rates. “Everyone is now focusing on deposits with maturities of three to six months because the direction of interest rates over the long term remains uncertain,” he said.
According to him, this uncertainty is one of the reasons some banks are offering comparatively lower rates on long-term deposits. “Deposit rates vary from bank to bank. We have determined our new rates based on our own assessment,” he added.
However, not all banks are reducing rates. Some lenders facing liquidity pressure continue to offer significantly higher rates to attract deposits. AB Bank, for instance, is reportedly offering interest rates as high as 13% on six-month, one-year and two-year deposits. It is also promoting deposit products under which customers can potentially double their money in five and a half years.
Policy rate cut adds pressure: Bangladesh Bank has taken several measures to bring down interest rates amid persistent inflationary pressure. After keeping its policy rate at 10% for nearly two years, the central bank recently reduced it to 9.5%. It has also imposed a maximum 4-percentage-point spread between deposit and lending rates.
Meanwhile, yields on government securities have also declined. The interest rate on 15-year Treasury bonds has fallen to 9.09%, around 1.25 percentage points lower than previously. The yield on 20-year Treasury bonds has also declined by more than 1.25 percentage points to 9.12%.
Yields on shorter-term Treasury bills have also fallen below 9%. The rate on 91-day Treasury bills has dropped to 8.72%, while 182-day bills offer around 8.81% and 364-day bills around 8.89%. The decline in government security yields has reduced banks' incentive to invest their excess funds in Treasury instruments.
Excess liquidity crosses Tk 4 lakh crore: Weak private-sector credit demand is another major factor behind the decline in deposit rates. Private-sector credit growth fell to just 4.47% at the end of June, according to the report.
At the same time, banks' investable excess liquidity crossed Tk 4 lakh crore for the first time. The amount increased by around Tk 71,000 crore in just one month. With credit demand remaining weak and returns from government securities declining, banks are increasingly reluctant to attract additional deposits at high rates.
This is prompting financially stronger banks to reduce deposit rates, particularly for longer maturities. The trend could eventually contribute to lower lending rates if banks succeed in bringing down their overall cost of funds. However, analysts and bankers say the pace of adjustment will depend on liquidity conditions, credit demand, inflation and the future direction of Bangladesh Bank's monetary policy.
For depositors, meanwhile, the changing rate structure means that longer-term deposits may no longer automatically provide the highest returns. Customers may increasingly have to compare short- and long-term products carefully before locking their money into fixed-term deposits.
