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percentage point to 8.5 percent this month, aiming to reduce the " cost of
funds" for the banks. Top bankers have taken the decision at a meeting of
the Association of Bankers Bangladesh (ABB), a platform of managing
directors of PCBs. The bankers argue that it is not possible to reduce the
lending rate without trimming the deposit rate. The latest move came despite
a reduction in corporate tax by 2.5 percentage points to 42.5 percent in
July. "We have decided to limit the highest deposit rate at 8.5 percent to
reduce the cost of funds," said Shahjahan Bhuiyan, managing director of
United Commercial Bank and vice chairman of ABB. The new deposit rate is
likely to take effect from August 16. An economist said savers could now
switch to other investment tools that give higher returns. "Small savers
have few options other than what banks have to offer," said Mustafa K
Mujeri, director general of Bangladesh Institute of Development Studies and
former chief economist of the central bank. He said some savers might flock
to saving certificates that give a 12.5 percent interest rate -- 4
percentage points higher than what the bank is going to offer. In April 2009
, PCBs set the deposit rate ceiling at 9.5 percent from the previous 13
percent, following Bangladesh Bank's order to limit the lending rate at 13
percent from an average of 14.5 percent. The central bank also wants the
spread -- the gap between lending and deposit rates -- to fall within 5
percent. The government later cut the corporate tax rate in July 2009 , to
cushion the banking sector against falling investments due to the global
financial crisis. But banks are yet to pass the benefits of corporate tax
cuts on to the customers, blaming the high prices of funds. Bhuiyan said his
bank's cost of funds is 10.5 percent at the moment and the impact of the
previous deposit rate cut is yet to be materialised for about 80 percent of
the bank's deposits. However, the cost varies from bank to bank. Pubali
Bank's COF was slightly below 9 percent on June 30. "A cut in the deposit
rate is necessary to reduce the lending rate and the cost of fund," said
Helal Ahmed Chowdhury, managing director of Pubali Bank, the country's
oldest and largest private bank. He said classified loans are also pushing
the bank's lending rate up. Chowdhury however said they lend to prime
customers at rates that are even below the rate set by the central bank of
13 percent in April. BB Governor Dr Atiur Rahman said on Sunday the cut in
corporate taxes should have an impact on bank lending rates. "The corporate
tax cut should be reflected in the lending rate," Rahman told a business
conference of the state-owned Janata Bank. He said the rate should come down
to a single digit.
