Bangladesh Bank caps lending spread at 4%, unveils one-time exit for bad borrowers

Bangladesh Bank on Monday introduced two major banking measures, capping the interest rate spread between loans and deposits at 4 percent while announcing a one-time exit facility for defaulted borrowers in an effort to ease borrowing costs and reduce mounting non-performing loans.

The central bank issued separate circulars directing all scheduled banks to implement the decisions immediately.

Under the first measure, banks have been instructed to keep the weighted average gap between lending and deposit rates within a maximum of 4 percent. The cap will apply to all loans except credit card lending and consumer credit.

The Banking Regulation and Policy Department (BRPD-1) said the move comes after several banks significantly widened the gap between loan and deposit rates following the introduction of a fully market-based interest rate regime.

Bangladesh Bank withdrew its earlier spread-related instructions in November 2023 after introducing the SMART (Six-Month Moving Average Rate of Treasury Bill) and margin-based interest rate framework.

In May 2024, the central bank shifted to a fully market-driven interest rate mechanism, removing regulatory limits on lending spreads.

However, the latest circular said some banks had since charged loan rates substantially higher than deposit rates, pushing up the weighted average interest rate spread to abnormal levels.

The central bank said the widening gap had increased borrowing costs for businesses, industries and manufacturers, adversely affecting economic activity and investment.

It said the new ceiling is aimed at keeping borrowing costs at a reasonable level while maintaining discipline in the banking sector. The restriction, however, will not apply to credit card loans and consumer financing.

In a separate move, Bangladesh Bank announced a one-time "special exit" facility for borrowers with long-defaulted loans to help banks reduce their growing stock of bad assets.

The facility will be available to borrowers whose loans were classified as "bad" or "loss" as of June 30, 2026.

Banks, including state-owned lenders, have been allowed to waive interest on such loans if borrowers repay the entire outstanding amount in a single instalment.

The scheme also covers loans that were classified as "bad" or "loss" and later rescheduled between August 6, 2024 and June 30, 2026.

The special facility will remain effective until December 31, 2026.

Bangladesh Bank said the measure is intended to reduce non-performing loans, improve banks' balance sheets and restore their capacity to extend fresh credit.

The central bank has asked banks to give priority to short-term agricultural lending and loans to the cottage, micro, small and medium enterprise (CMSME) sector while implementing the scheme.

The move comes as the country's banking sector continues to face a sharp rise in defaulted loans.

According to Bangladesh Bank data, classified loans climbed to Tk 588,704 crore at the end of March, up by Tk 31,487 crore from Tk 557,217 crore three months earlier.

The ratio of non-performing loans also increased to 32.26 percent of total outstanding loans at the end of March from 30.6 percent at the end of December.