Savers left in limbo: Amid limited investment opportunities, depositors turn to banks though deposits offer no real returns

The Daily Star December 16, 2020

Companies and well-off households are parking funds at banks in the form of deposits despite no return in real terms primarily because of lower investment and consumption caused by the pandemic-induced uncertainties.

Total deposits in the banking sector stood at Tk 13,45,436 crore as of September, up 12.40 per cent year-on-year.

But the question is whether depositors would get any positive return on their deposits with banks at the moment. The answer is no.

Bankers and analysts say the real interest rate now hovers around the negative territory given the higher inflation rate.

The situation may not change anytime soon, so there is little possibility for the deposit rate to go up in the next two to three years, they warn.

This means a negative real interest rate of 2-3 per cent.

The sorrow of the savers who have kept their money in savings accounts is deeper than that of the depositors of FDRs as many banks offer less than 2 per cent interest rate for the products.

The weighted average interest rate on deposits stood at 4.73 per cent, the lowest in a decade, data from the central bank showed.

Although depositing money in banks now only brings losses for savers, there are not enough options for them where they can invest and get expected return.

The only safe option is government savings certificates and bonds, whose interest rates can reach as high as 11.76 per cent — way higher than what banks offer.

As expected, net investment in the government savings tools has been on an upward curve: it stood at Tk 15,642 crore in the first four months of 2020-21, up 183 per cent year-on-year, according to data from the Department of National Savings.

But, the government lowered the maximum investment ceilings of three types of savings certificates on December 3 such that it gets some respite from the burden of higher interest rates.

The securities are the five-year Bangladesh savings certificate, the three-month profit-bearing savings certificate, and the family savings certificate.

As per the new rules, investors are allowed to purchase these savings certificates up to Tk 50 lakh in a single name and Tk 1 crore in joint names in contrast to Tk 1.05 crore and Tk 1.20 crore respectively.

So, a large number of depositors have to go back to banks to keep their money despite the negative interest rate. Depositors will be in a tight spot until both the local and global economies make a turnaround from the current economic meltdown.

“The capital market would have been one of the best options for individual investors if there had been a strong structure,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

“But, people stay away from the bourses as investment in the capital market is highly risky,” he said.

He warned that the negative real interest rate would persist at least for the next three to four years.

The private sector’s appetite for credit is important to give a boost to the interest rate on deposits, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

The year-on-year credit growth stood at 8.61 per cent in October, down from 9.48 per cent a month earlier.

Businesses have embraced a cautious approach in setting up new industrial units and expanding the existing ones, Rahman said.

The large volume of deposits has created difficulties for banks, he said.

Twenty-one banks saw more than 14 per cent year-on-year deposit growth in the third week of September.

“The general public is now in a financial trauma due to the ongoing pandemic, and they have little interest in consumption. Rather, they are trying to build up their deposits to cope with the uncertainties,” said Md Arfan Ali, managing director of Bank Asia.

Imports of capital machinery and industrial raw materials have nosedived in recent months, fuelling deposits at banks as well, he said.

Businesses now park their money at banks whereas this money was supposed to be used to make import payments, he said.

Import payments dropped 13 per cent year-on-year to $17.06 billion in the first four months of the current fiscal year.

Shah Md Ahsan Habib, a professor of the Bangladesh Institute of Bank Management, said that depositors would have got an option if a vibrant bond market had existed in the country.

Any picking up of the deposit rate would depend on the recovery of the global economy, he said.

Businesses now prefer borrowing from abroad as the lending rate on foreign funds is lower than the local ones. Funds remain idle at local banks if businesses flock to foreign sources.

The six-month Libor rate stood at 0.25 per cent this week compared to 1.88 per cent a year ago. Local banks charge an interest rate of 7 per cent to 8.50 per cent.

The London Interbank Offered Rate (Libor) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.

The excess liquid fund in the banking sector has become a global phenomenon due to the ongoing financial meltdown.

For instance, total deposits held by eurozone banks rose 10.3 per cent in the year to July, climbing above 12 trillion euros for the first time, the European Central Bank said recently, according to a Financial Times report.

In Bangladesh, many people from the lower-middle-income groups are withdrawing funds from banks as the pandemic has rendered them unemployed.

But this has had little impact on the banking industry’s overall deposits as the government is injecting a large volume of money into the market to implement the stimulus packages.

Bangladesh has so far declared 21 stimulus packages worth around Tk 121,000 crore, which is 4.34 per cent of the country’s gross domestic product.

Of the fund, banks are providing Tk 87,750 crore to execute seven packages.

The central bank is mostly implementing the packages by injecting reserve money, which is widening the deposit base in banks further.

Reserve money is also called central bank money, monetary base, base money, or high-powered money. It is the base level for the money supply or the high-powered component of the money supply.

“Availability of Covid-19 vaccines will help the economy pick up. Still, consumption will not rise overnight as people will take time to go back to their previous level for consumption,” Mansur said.

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