Interest on bank savings, including fixed deposit receipts (FDRs), has now plummeted to as low as 5 per cent, jeopardising the middle and lower middle classes, since a savings instrument like the FDR was the lone ‘saving’ grace for most of them.
Ordinary people, who used to live on bank interest by putting large amounts of savings or pension pay-outs as FDR into banks, are now losing money because of the negative interest-inflation gap.
Just four or five years ago, if someone deposited Tk. 1 lakh into a bank as FDR, he/she would have received Tk. 1,000 per month as interest. But now it has come down to Tk. 500 for Tk. 1 lakh. The government has projected inflation at around 5.5 per cent in the 2016–17 fiscal years. This means that Tk. 6,000 as interest for Tk. 1 lakh in a year would ultimately become a loss for an FDR holder because that person would be able to buy less with that money because of such inflation.
Abdus Salehin, a recently retired government official, told The Independent that he was planning to put all his pension and provident fund money into FDRs. “Now I find that the interest that I am going to get would not be sufficient.”
Salehin said common people like him do not have much options for savings. “Investments in the capital market are risky. We are not used to keeping the money in any financial institution except banks.”
On February 2, Bangladesh Bank (BB) directed commercial banks not to reduce the rate of interest on savings. The central bank says by doing so, non-productive spending is spurred and the savings habit is discouraged. It also puts strain on economic policymaking, the bank told CEOs of the commercial banks in a letter. Instead, the central bank suggested improving ways to recover bad debts and narrow intermediate spread.
According to BB data, the interest on deposits was 12–14 per cent in 2012, but the average rate declined to 8.61 per cent in 2013. The average rate of deposits of the country’s banks has now fallen to 5.22 per cent since last December.
Meanwhile, at end-December 2016, the credits deposited in banks and other financial institutions stood at Tk. 908,000 crore, which is 13.1 per cent more compared to the previous year. The growth rate was 13 per cent in banks and financial institutions in 2015.
Most of the commercial banks now have adequate funds to provide loans. But as they are not getting enough borrowers to take such loans, they have become less interested to take more deposits. In doing so, they are lowering the interest rates, said sources with the banking industry.
Talking to The Independent, Mamun-Ur-Rashid, managing director of Standard Bank, said the banks cannot decrease or increase the interest rate on their own. “The availability of money in the society is the main factor in driving the interest rate,”
he said.
“When money becomes readily available, the interest rate becomes low, but when money-making becomes hard and not that much available, then the interest rate goes higher. Now the purchasing power of the average person in Bangladesh has increased than before. His/her aspirations for consumption have also increased with his/her increased purchase capacity. So, more money is now being rolled in the market, which has increased the liquidity and flow of money. This is causing the reduction in the interest rate in the market.”
Rashid added that it was not a one-way reduction. “Because of this cash flow into the market, we cannot lend money at higher rates now. So the interest rates for depositors with the bank have fallen. Availability of resources has made these lower.”
Explaining the lower interest rates on deposits, Rashid explained that the value of money depends upon the inflation rate that persists in an economy. The higher the inflation, the lower will be the value of currency.
“Now, the interest rate is nothing but the time value of money. Interest is the compensation paid for depreciation in the value of currency with time. Thus, higher the inflation rate, higher would be the interest rate. Since inflation is lower in the developed economies, a lower interest rate follows.”
Meanwhile, people from all walks of life are inclining towards purchases of saving certificates due to the high interest rates. As a result, the sales target for saving certificates for the ongoing fiscal year has been exceeded in the first six months (July–December). The net sales of savings have been Tk. 23,473 crore in the first six months. The government’s target for the whole year, however, was Tk. 19,610 crore from the sales of savings certificates.