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BB lowers bank margins as interest rates rise


Bangladesh Bank (BB) has reduced the margin banks use to determine lending rates in response to the significant increase in interest rates on loans. This measure aims to mitigate the burden of borrowing costs and alleviate companies' challenges.


The central bank said that banks could impose a maximum margin of 3 % over the benchmark rate, the Six Months Moving Average Rate of Treasury Bill (SMART). The percentage decreased from 3.5 %.


As a result of the reduction, the upper limit for interest rates on loans in April is set at 13.55 %.


The decision is being made because the SMART index surpassed the double-digit threshold and reached 10.55 % after March, indicating a more constrained liquidity condition within Bangladesh's banking industry.


According to a high-ranking representative from a private financial institution, if the BB had not reduced the margin, the interest rate would have surpassed 14%.


In an attempt to mitigate the surge in the interest rate, the central bank has once again reduced the interest margin.


In July of the previous year, the Bank of Bangladesh (BB) implemented the SMART policy to align the interest rate with market dynamics. This included removing the 9 % lending rate cap to increase the cost of borrowing and mitigate the significant inflationary pressures.


At first, it permitted banks to impose a maximum margin of 3.75 %. The margin decreased by 25 basis points to 3.5 % in February.


The second reduction occurred in response to the increasing demands among the business sector to mitigate the expenses associated with borrowing and the overall cost of doing business.

Yesterday, the central bank said it reduced the margin to sustain economic dynamism.

The reduction in funding will have repercussions for banks, as stated by Syed Mahbubur Rahman, the managing director of Mutual Trust Bank.

The growing market demand for government bills and bonds is increasing bank deposit costs. To entice depositors, banks are now compelled to provide greater interest rates. We are under significant strain.

As of June 2023, the weighted average interest rate for deposits was 4.38%, while for loans, it was 7.31%. According to BB statistics, the rates increased to 4.92 % and 9.75 % in January, respectively.



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