In the last six months, the BB has brought down its interest charge on treasury bills by 2 per cent, from 10 per cent to 8 per cent. The one-month bill rate was brought down from 8.5 per cent to 6.5 per cent and one-year rate from 10 per cent to 8 per cent.

The aim was to discourage banks from investing in high rate bearing instruments and rather channelise the funds into the market at lower rates. At the same time, it was a signal to the banks that they should not go charging high.

One of the inspirations for the BB was the Pakistan experience where monetary vigil has pushed down the interest rate to as low as 1.5 per cent, even under inflation rate.

But this apparently did not work because of weak market forces and high spread the banks keep between deposit and lending rates.

Bankers now feel that with the new move to allow private banks to have deposits of government funds, the banks will have access to cheap cash and so, their lending rates will tumble.

Moreover, the BB has planned to make the interest rate on savings instruments tagged to treasury bill rates from December. This will further allow banks to lower the deposit rates.

At the end of the day, bankers feel they will be able to cut rates at least by 1 to 1.5 per cent.

With the current spread, banks are making huge profits every year with their cumulative profits in the last six months standing at about Tk 800 crore.

Some commercial banks are making high profits in the form of as much as 50 to 100 per cent return on their capital and with the current market value of shares, most sponsors get about 100 per cent returns a year.

The banks now maintain about 5-6 per cent spread, which many bankers feel should be at around 3-4 per cent in an ideal situation. For example, in the US, the Fed rate is now 1 per cent and the prime lending rate is 4 per cent.

According to a central bank study, the average cost of funds of the nationalised as well as private and foreign banks operating in Bangladesh is 9 per cent, while the average interest rate on advances is 13.10 per cent.

The cost of funds is calculated on the basis of administrative costs (2.5 per cent) and average interest rate on deposits (6.5 per cent).

The nationalised banks' average cost of funds is 8.59 per cent, within which the interest rate on deposits is 6.31 per cent and administrative cost 2.28 per cent. Their average interest rate on advances is 12.35 per cent that creates a spread of 3.76 per cent.

However, having a high rate of loan defaults, provision deficit and capital shortfall, the nationalised banks have to incorporate these costs into their account and maintain high interest rates on advances.

On the other hand, the private banks' average cost of fund is 9.85, within which interest rate on deposits is 7.2 per cent and administrative costs is 2.65 per cent. And their average interest rate on advances is 14.2 per cent.

Experts said as the private banks do not have huge burdens of loan default or provision deficit, they have no reason to maintain this profiteering trend. Moreover, they have some other extra-loan sources of income.

The foreign banks' average cost of funds is 7.09 per cent, within which interest rate on deposits is 4.39 per cent, and their administrative cost is 2.9 per cent, while their average interest rate on advances is 11.97 per cent.

Even a private bank maintains as high as a 15.46 per cent weighted average interest rate on advances. This however does not apply to prime clients who get one-year loans for as low as 10 per cent.

"Due to higher costs of fund, we are incapable of reducing the interest rate on advances," a private bank official told The Daily Star when asked about the high lending rate.

Out of the 30 private banks, 18 have an administrative cost below 3 per cent, while the remaining 12 banks' administrative costs range from three to four per cent. Among these, the newer banks have a higher (10 per cent) weighted average interest rate on deposits.

Former finance and planning adviser to the caretaker government Professor Wahiduddin Mahmud thinks the lending rates in real terms are currently too high and they adversely affect investment and other economic activities.

"The lending rates in nominal terms have not changed much since the 1980s, although the inflation rate in the economy has been significantly reduced," he told The Daily Star.

He observed that more competition in the banking sector has not led to a squeezing of the very high spread between the deposit and the lending rates. Instead, the relatively efficient private banks, including the foreign banks, are reaping excess profits.

Prof. Mahmud said the interest rates at present are rigidly determined and are not very responsive to the central bank's market-oriented interventions.

Some private banks are offering higher interest rates to attract deposits, which may hurt their longer-term financial health. The banks should be able to attract deposit by their goodwill, and not by offering higher interest rates, he said.

Talking to The Daily Star, Chairman of Bangladesh Association of Banks (BAB) Syed Manzur Elahi said, "The spread between cost of funds and average interest on advances should be kept around three per cent."

He however said a reduction in the interest rates is completely a matter of the individual banks. "The BAB cannot impose anything upon them, but we would discuss with the banks' directors about the interest reduction."

Managing Director of Pubali Bank Khandakar Ibrahim Khaled attributed "the lack of professionalism among bank officials, absence of corporate culture in the banking sector and lack of customer awareness" to the absence of competition on interest rates.

Advisor to Premier Bank Limited Kazi Abdul Majid said in a low inflation rate (5 per cent) regime, the banks should not pay such a high rate (12 per cent) on deposits and so be forced to charge higher rates on loans.

The BAB and Bankers Club can help develop cooperation among banks and bring down the interest rates if they are sincere, he said.

"The bankers must realise that paying a high rate of interest on deposits and correspondingly charging higher rates on loans are not helping anybody, not even the banks. The sooner they realise this the better for all."