Consumers saved Tk1.65 lakh crore during pandemic

Even amid the historic low interest rates of bank deposits, consumers socked Tk1.65 lakh crore away in 2020, the highest in the last five years, thanks to saving tendency in the pandemic time.

Current deposits mostly contributed to higher savings, which reflected that wealth of rich people increased owing to limited spending opportunities amid lockdowns.

On the other hand, loan growth was 8.4%, the lowest in the last five years.

As a result, the gap between outstanding deposits and loans widened considerably to Tk2,04,750 crore last year from Tk1,30,740 crore a year ago, according to the financial stability report of the Bangladesh Bank for 2020.

The savings spree continued even in June this year, registering 14.34% year-on-year growth reflecting that consumers have yet to come back to spending, raising a concern of delay in the economic recovery.

The total deposit stood at Tk14.27 lakh crore in June this year.

Bank savings started to swell after the virus hit the country in March last year as people shied away from spending, fearing uncertainty.

Amid the high deposit growth, banks cut down interest rates to 2% to 3% last year from above 5% in the preceding year. 

On the other hand, sluggish loan demand and pumping of fresh money by the central bank through relaxing monetary tools piled up excess liquidity in the banking system, discouraging banks to take term deposits. 

As a result, the current deposit grew faster than the term deposit last year.

The current deposit recorded the highest growth of 24% in 2020 from 8.8% in the previous year when term deposits grew by 18.9% from 9.9%, according to the report. 

The growth of current deposits – money deposited into bank accounts with funds that depositors may withdraw on-demand at any time – shows that disposable income is piling up in bank accounts.

The significant rise in current deposits boosted the overall deposit growth to 13.6% year-on-year last year, the highest in the last five years.

However, the surge in savings is not equally balanced across society. The growth of term deposits has slowed down, reflecting that low-income people are spending their savings amid job cuts and income losses.

Despite the low interest rate, banks saw good deposit growth as interest rate matters little to customers, said Ali Reza Iftekhar, managing director of Eastern Bank and also the chairman of ABB (Association of Bankers Bangladesh).

Customers now give importance to banks' service quality and reputation instead of interest rates, he also said.

Describing the reason behind high deposit growth and low credit demand, the central bank in its stability report said, "The Bangladesh Bank's various policy supports and sizeable refinance schemes, reduction in CRR (Cash Reserve Ratio) along with strong foreign remittance growth, and reduction in service charges on deposit products, among others, were some of the key reasons behind the rise in deposit growth during the last year amidst the Covid-19 pandemic.

"However, higher deposit growth provides banks with options for greater asset growth and also provides them with enough cushions to manage their liquidity."

The central bank also came up with a suggestion in the report, saying, "To keep pace with the growth momentum and to ensure sustainable growth, banks need to utilise their increased deposit base and ensure smooth credit flow to the thriving private sector."

Banks are in a comfortable position with a good inflow of savings, but the income erosion of depositors raised concern among the central bank, prompting it to set a cap on interest rate on deposits.

The Bangladesh Bank on 8 August issued a circular instructing banks that the interest rate of term deposits must not be less than that of inflation.

In the circular, the central bank observed that most banks are offering lower interest rates for deposits than the inflation rate. As a result, savers are being affected and losing their purchasing capacity.

In this situation, depositors are diverting their money to unproductive sectors instead of parking in banks. Such a trend will affect banks in the future, creating imbalance between deposits and assets, said the circular.