Cenbank caps interest rate spread at 4% to reduce borrowing costs

The Bangladesh Bank on Monday set the maximum average interest rate spread for a bank at 4% in a bid to lower business borrowing costs and spur economic growth.

Some banks have set their weighted average interest rate spread, the gap between deposit and lending rates, between 7% and 9% to book extra profits, while the banking sector's average interest rate spread stands at around 5.72%.

Many businessmen have alleged that the higher spreads have heightened their borrowing and business operational costs.

The Banking Regulation and Policy Department (BRPD) issued a circular on Monday, saying that the new cap will come into immediate effect as some banks were hiking borrowing costs.

The cap will not apply to credit cards or retail borrowers, who carry more risk than business entities.

In November 2023, the Bangladesh Bank liberalised interest rate spreads and let market forces determine the weighted average figure. The move was aimed at satisfying demands made by the International Monetary Fund (IMF).

Now, the central bank has brought back the ceiling to mixed reactions from businesspeople and economists.

Small and medium sized enterprises fear the cap will discourage banks from extending loans to them.

Economists suggest adopting measures aimed at reducing default loans in the banking sector, instead of capping interest rate spreads.