Banks bet for deposit boost to replenish liquidity

Commercial banks have started pursuing their fresh deposit-alluring strategy as the newly monetary policy is changing the equations in the country's banking system for uncapping interest.

In the monetary policy statement or MPS unveiled Sunday Bangladesh Bank (BB), the country's central bank, removed the deposit floor rate cap and increased banks' lending-rate ceiling on consumer credits up to 3.0-percentage points to 12 per cent.

The minimum deposit rate was the average of three months' inflation rate, and the consumer credit refers to personal loan, and loan on car, real estate, education etc.

Under such circumstances, bankers think, banks having liquidity shortfall would go for offering higher rates to grow deposits while banks with enough funds would go for lower interest rates in their deposit-driving strategy.

"We're now planning to review our deposit-attracting strategy. We're now observing the situation," Managing Director and Chief Executive Officer (CEO) of Social Islami Bank Limited (SIBL) Zafar Alam told the FE.

Hailing the decision on withdrawing deposit floor rate and relaxing the lending-rate cap on consumer goods, he said the depositors, specially the retired persons, would get benefited in the form of getting more returns on their investment in banks.

"Like the consumer credits, I think the BB can now consider lifting lending-rate cap on other areas," the banker added.

Managing Director and Chief Executive Officer (CEO) of Brac Bank Selim R. F. Hussain said there was an obligation for banks under the deposit floor cap to offer depositors such a rate as was not lower than that of the average of three months' inflation rate.

With official announcement of removing such floor rate, he said, the banks now can offer any rate that will be suitable for them. "This is certainly a good decision. Some banks might lower the rate while some others would go for higher rate."

Managing Director and CEO of Mutual Trust Bank Limited Syed Mahbubur Rahman said banks having more investment on consumer loans will be able to offer higher rates to grow their deposit base due mainly to the increase in lending-rate cap on consumer goods.

But banks not having liquidity shortfall might go for a cut in deposit rates. "I think banks would soon review their deposit-related plan based on their capability."

The banker opines that official enhancement of lending-rate ceiling on consumer credits is a good indication for the banking sector. "I hope the central bank would consider going for uncapping the interest rate on other areas."

Meanwhile, BRAC EPL Stock Brokerage Limited in its analysis sees the removal of floor rate as contrary to interests of depositors' who are already facing negative real rates. BB is eyeing the floor removal to aid deposit growth in banks, which implies banks to go for more deposit but be able to offer lower deposit rates.

"We may see this causing further drain on liquidity as (i) depositors are encouraged to look for positive real return in high inflationary situation should banks go for lower deposit rates, and (ii) offering higher deposit rates strain banks' already-weakening spread, in absence of return opportunities," it said.

Taking the liquidity aspect in the system alongside pre-existing NPL and governance issues, it will create a scenario where weaker banks would go for higher rates to grow deposits while stronger banks get more deposits despite lower rate as depositors' 'flight to quality' shifts more liquidity to better banks.

The net impact can be another round of increase in call-money rates, continual pressure buildup on lending rate, and lower liquidity in a significant part of banking system.

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