Nesar Uddin, 65, after retiring from service six years ago, had kept his pension at a bank as a Fixed Deposit Receipt (FDR). He was covering all his expenses with the interest on his savings for the past five years. Nesar’s five-year term FDR matured on May, 2017. He wanted to put his money into another FDR, but had found out that the interest rate has dropped by around 40%.
“People like me do not have enough options for savings. We usually put our money in a bank, rather than any other financial institutions. I went to the bank to open another FDR with my pension. In 2013, the bank gave me an interest rate of 8.5%, but now they are offering me less than 5%, which is not nearly enough for me to survive,” Nesar Uddin told the Dhaka Tribune.
Just like Nesar Uddin, a significant number of people belonging to the middle and lower-income class, who depend on interest from banks, are facing financial difficulties due to the ever-decreasing interest rates on bank deposits.
According to a latest Bangladesh Bank report, the average interest rate on bank deposit was 8.54% in June, 2013, and it stood at 4.84% at the end of June this year. This means that the interest rates have dropped by 43% in the past five years.
Not just the interest rates, but bank deposits have been affected by the rate of inflation. At the end of June this year, the inflation rate stood at 5.94%, which was 8.05% in June, 2013. If adjusted for inflation, the depositors’ money kept at banks is actually losing value due to the interest-inflation gap.
Former financial adviser to the caretaker government, AB Mirza Azizul Islam, told the Dhaka Tribune: “The inflation rate is above the interest rate on bank deposits. There are also other factors, such as advance income tax, excise duty and bank service charges. Because of these reasons, if I deposit my money at a bank, it is likely I will have to suffer losses.”
He suggested that the interest rate on bank deposits should be increased to support the middle and lower-income class people.
The Dhaka Tribune approached several bank officials and experts in the sector for their thoughts on the issue, and several factors have been identified as contributing to the decreasing interest rate. Some of the key factors are sluggish growth of credit to private sector, reduced lending rate, government’s dependency on national savings certificate (NSC) sales, pressure of excess liquidity and non-performing loans (NPLs).
According to the latest Bangladesh Bank report, the credit disbursed to the private sector was around 25% of the total loan five years ago, which has dropped to 15.66% at the end of fiscal year 2016-17.
The report further stated, Bangladesh government borrowing from the banking system has decreased by around Tk25,000 crore since the fiscal year 2014-15. At the end of the last fiscal year, the total amount of government loans from banks stood at Tk90,660 crore compared to Tk1,15,000 crore at the end of the FY2014-15.
The government borrowing from banks has decreased due to the rise of saving certificate sales, said banking sector analysts.
According to National Savings Department (NSD) statistics from July to June of the FY2016-17, the government had sold saving certificates worth Tk52,3278 crore. Meanwhile, a recent central bank report shows, the non-performing loans in the banking sector have increased by Tk11,976 crore in the first six months of the current year.
At the end of June, 2017, the total NPL stood at Tk74,148 crore, which is 10.13% of the total disbursed loans of Tk7,31,625 crore. The NPL was Tk62,172 crore at the end of December, 2016.
The banks are being pressured by the central bank to maintain a 5% spread and there is also demand from businesses to maintain a single-digit interest rate for loans. The average interest rate for loans stood at an average of 9.46% at the end of June this year.
Chairman of the Association of Bankers, Bangladesh (ABB), and Managing Director of Mutual Trust Bank Anis A Khan told the Dhaka Tribune: “The interest rate for deposits has to be reduced, as we have improved in the macro-economic indicators. Our foreign reserve is good and the inflation rate has decreased. There is a demand from businesses to reduce the interest rate for loans.
“There is huge access liquidity in the banks, and the government is not borrowing from us. Considering these factors, we should decrease the deposit interest rate,” he added.
He further said, “We are fighting against the NPLs, which could undermine the efforts to increase the interest rate on bank deposits. But, if businesses fail to repay their loans, it leaves us with no choice.”
Khan, however said, it is the government’s duty to create a national pension fund to support the middle and lower-income people.
Speaking on the issue, Biru Paksha Paul, former chief economist at the Bangladesh Bank told the Dhaka Tribune: “The banking sector operates like a chain. When a part in the chain suffers losses, the other parts are automatically affected by it. The fall in deposit interest is the result of government’s dependency on national savings certificate (NSC) sales.”
Meanwhile, BIBM Director General Toufic Ahmad Choudhury told the Dhaka Tribune: “Due to increasing pressure on bankers to reduce the interest rate on loans, they are reducing the interest rates on savings, which is not ethical banking. Because, the interest rate on loans can be reduced using other means, such as, reducing the administrative cost and non-performing loans (NPLs)”.
Talking to the Dhaka Tribune on the issue, Bangladesh Bank Executive Director Subhankar Saha said: “In terms of open market economy, we don’t set the deposit interest rate for the banks. It depends on the market. But, the deposit interest rate must be set accordingly, to keep both the bank and the depositor in mind. If the interest on bank deposits drops too low, it will also affect the banking sector.
“Considering this ethical point, we directed all the banks on January, 2012 to halt reducing the rate of interest on savings,” he added.
Subhankar Saha pointed out, in the circular issued to the CEOs of all the commercial banks in 2012, BB had clearly stated that due to the decreasing interest rate on deposits, people’s saving habit is being indirectly discouraged.
“Through the circular, we asked bank CEOs to improve the ways to recover bad loans and narrow intermediate spread. We also directed them to increase managerial capacity and reduce the operational cost,” Saha told the Dhaka Tribune.
While asked about BB’s stance on the present rate of deposit interest, as it is below the inflation rate, the BB executive director said, “We are looking into the matter and analysing the situation for a sustainable solution.”