In Bangladesh, a considerable percentage of retirees depend on the interest income from their savings as well as in government savings certificates.
A retired person with no other income source on average earns approximately 3% on his savings from the bank whereas the inflation rate historically hovers around 6% level. Essentially, the retiree is effectively left with no income at all to survive.
The country's banking fraternity has been experiencing this single-digit interest rate regime since April 2020 during which the lending rate ceiling was set at 9% while the fixed deposit rate was set at 6%.
Consequently, the depositors are often left with zero or even negative real interest rates. In my last article titled "Nine to six: Dawn to dusk" published in TBS on 27th May 2020 this issue had been addressed and I tried to highlight fiscal and monetary policy mix as a policy tool with a view to undertake any strategy that would directly affect the overall population and their financial situation.
Since the onset of the Covid-19 pandemic, the Central Bank has been quite reasonable given that they have not imposed any stringent regulation in revisiting capital adequacy for the banks.
However, the regulators recently decided to issue a new guideline for banks that would enhance one of the Basel III liquidity parameters, namely Leverage Ratio, from 3% to 4%.
This decision would be implemented by gradually raising the leverage ratio on a 25 point basis yearly starting from 2023 to be aligned with the international best practice.
Unfortunately, the banking industry has been going through a series of debacles since August this year. With the real interest rate for depositors falling below the inflation rate, depositors are earning negligible and sometimes negative returns on investment.
On top of that, the new guidelines made the banks shuffle their deposit base only to arrest their cost of funds and ensure the spread.
Just when the banks were facing these challenges to manage their cost of funds, the yields against the Treasury securities had started to move up in the auctions!
Since banks keep their investment portfolio in a mix of HTM (Held-to-maturity) and HFT (held-for-trading) and the securities kept under HFT for trading purposes are required to be revalued (which is technically called mark-to-market).
Conceptually, when the yield of an instrument goes up, the price or value of that security moves in the opposite direction i.e. goes down.
Hence, the value of the investment portfolio kept under HFT has been reduced and that reduced amount has to be booked as a loss!
Realising this, recently the central bank has allowed primary dealer banks to re-measure their HFT securities which is a very timely decision indeed.
For the last couple of months, this is evident that the securities yields have increased by almost 200 basis points in the primary auctions.
On a practical ground, the government would not want to increase its cost of borrowing. On one hand, the securities yields are continuously increasing, Yet, the government has changed the interest rate on NSCs (National savings certificates) effective from 21st September 2021. After this new directive is put in place, the poor savers will enjoy an interest rate at a reduced rate.
Globally, there are countries where interest rates are even less than 1%. Being a welfare state, this may seem to be normal where the population is secured under a social safety net. Unfortunately, such a system is absent in Bangladesh.
The condition and status of a country like ours do not seem to be consistent with the interest rate structure which prevails in advanced countries.
Bangladesh stands in the middle-income category where the majority of the population is from the middle to lower-middle class. The poor savers should be incentivised in such a manner that they may end up with a considerable real return in their elderly age.
The decision for implementing the single-digit interest rate era had seemingly been taken to satisfy the vested interest groups.
All the challenges and stumbling blocks faced by the banking industry that have been evidenced since the last two years have emerged from the single-digit regime.
Had this not been implemented, there would not be any need for the further imposition of any ceiling or capping or whatsoever.
Rather than focusing only on bank interest rates, this would have been much more effective if we focused on other tools. From the fiscal side, the tax net could have been widened so that a large number of people could be brought in under the tax bracket.
All these strategies have a spiral effect and are interlinked to each other. This may not seem to be an exaggeration to say that those days are not far away when we may experience the abolishment of the six-nine regime!
Anirban Haq is the Risk Manager of a foreign bank in Bangladesh and can be reached at: Anirbanhaq@gmail.com
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.