Deposit rates now cannot go lower than inflation

The Bangladesh Bank has now set a floor on deposit rates for the sake of depositors as they are now getting an interest return lower than the inflation rate, which erodes their purchasing capacity. 

From now on, the interest rate of term deposits must not be less than that of inflation, according to a circular issued by the Bangladesh Bank on Sunday. 

In case of setting a monthly interest rate on deposits of three months or above, banks have been instructed to calculate average inflation of the previous three months, according to the circular that will come into effect immediately. 

In the circular, the Bangladesh Bank observed that most banks are offering lower interest rates for deposits than 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. 

Currently, most banks are offering 2% to 3% interest rates on deposits, the lowest in recent history and far below the 5.56% inflation rate as of June, according to the Bangladesh Bank data. 

The lowest deposit rate is the spillover effect of excess liquidity and lending rate cap.

The Bangladesh Bank has set a 9% lending rate cap from 1 April last year. As a result, banks went for a massive cut in deposit rates to adjust their fund costs. 

Meanwhile, the central bank pumped huge excess liquidity into the market through relaxing monetary instruments during the pandemic, aiming to make money cheaper. 

The excess liquidity, which stood at the historic highest level of Tk2.39 lakh crore in June, has now turned into trouble for banks, creating price pressure and bringing down deposit rates at the bottom. 

At the same time, lending rate came down to 6% to 7% amid ample liquidity in the banking system. 

In this perspective, the central bank decided to go for mopping up excess liquidity from Monday through issuing Bangladesh Bank bills. 

The interest rate floor on deposits has come at a time when the central bank has moved to rein in excess liquidity, said a senior executive of a private bank. 

As a result, an artificial crisis might be created in the market, which will lead to a rise in deposit rates, he added. 

Low interest rates are a blessing for borrowers but a curse for middle-class depositors who depend on interest earnings. Money in banks is now a loss for them.

If anyone keeps Tk25,001 in a bank at a 4% interest rate, the annual return will be Tk1,000.

But, depositors will have to pay Tk400 (Tk200 twice a year) in account maintenance fee plus a 15% VAT amounting to Tk60 on it and a 15% tax (in case of not having a tax identification number) totalling Tk120. With the 5.63% inflation calculated, the cost will be Tk1,407 on a Tk25,001 deposit.

After deduction of the total costs of Tk2,017, depositors will see a loss of Tk1,017 from a bank deposit – meaning the total deposit balance will reduce to Tk23,983 at the end of the year.

The dilemma of the middle class has also come to the central bank's attention. The regulator in April this year halved the account maintenance fee for this year, taking the pandemic into account.

Depositors who have a deposit of up to Tk10 lakh in their savings accounts in 2021 will get this facility. The facility will not be applicable for current accounts.

According to the decision, banks will deduct the account maintenance fee once instead of twice for this year.

The reduction of account maintenance fees will give savers a little relief. This is because after the reduction of the account maintenance fee, a saver will now incur a loss of Tk817 against a Tk25,001 deposit at the end of the year.

Despite losing money, deposit growth is still high above 14% in June as people are conservative in spending amid the crisis period. 

The total deposit in the banking sector stood at Tk14.27 lakh crore in June, according to Bangladesh Bank data. 

What experts say

Dr Ahsan H Mansur, executive director of the Policy Research Institute, told The Business Standard that the central bank's decision to use inflation as a floor on the interest rates of term deposits is illogical. As a result, banks will no longer have fixed deposits.

Banks will not receive deposits at high interest rates as they can get money at a lower rate in the call money market. Besides, there is a low demand for loans in the economy, he also said.

The banks will not be able to lend at 9% after taking deposits at a rate equal to not less than the inflation rate. So, this decision will only increase chaos in the banking system, Ahsan said, adding that the central bank should consult with stakeholders concerned in making any decision on such issues.

He further said the interest rates of deposits will increase only if the decision to mop up excess liquidity from the market is implemented. Besides, inflation will also come under control.

Dr Khondaker Golam Moazzem, research director of the Centre for Policy Dialogue, said the CPD did not support the central bank when it had earlier set interest rates on lending at 9% and deposits at 6%. This is because the cap on interest rates hampered disbursements of SME loans by banks.

The central bank is now using inflation as a floor for setting interest rates on deposits, but inflation is likely to rise further, he added.