Welcome to Business Outlook
Related Articles
Diminished confidence in the non-banking financial sector amid various irregularities, discouragement of savings certificates, stock market volatility and overall lack of investor confidence in the business sector are compelling people to deposit their hard-earned money in saving accounts.
According to Bangladesh Bank data, savings deposits in banks have risen in recent years in spite of the pandemic and the lower interest rates.
Such deposit accumulation is one of the key sources of the banks’ funds that grew by 22.6% in March 2022 on a year-on-year basis.
It was 20.18% in March 2020 and 19.97% in the same period of 2019.
Consequently, the yearly average deposit per account also rose to Tk33,000 in March 2022, which was Tk31,000 in 2021 and Tk27,000 both in 2020 and in 2019.
The growth in the total deposits in 2022 was around 15% while the nominal GDP is around 13%.
Economists and people concerned in the financial sector say this usually happens because of economic growth.
Although some argue that these deposits have negative returns in proportion to the inflation rate, this is becoming a major headache for the shrinking deposit dividends but this saving amount in the banking sector is rising as there is a limited offer for investment and the people have more confidence in the banking sector than any other sector for investment.
Earlier on August 8 last year, Bangladesh Bank issued a circular where they said, the interest rate of term deposits must not be less than inflation.
In case of setting a monthly interest rate on deposits of three months or above, banks have been instructed to calculate the average inflation of the previous three months, according to the circular that will come into effect immediately.
Low-interest rates are a blessing for borrowers but a curse for middle-class depositors who depend on interest earnings. But if we look at the Bangladesh Bank data, in the last six months, the average inflation of the country was 5.91%, 5.96%, 6.02%, 6.08%, 6.22% and 6.64% respectively.
The Scheduled Banks Weighted Average deposit rate from January to May was 4.01%, then 4.02%, 4.01%, 4.02% and 4.02% respectively.
However, the actual inflation during this time was 5.86%, 6.17%, 6.22%, 6.29%, 7.42% and in July it hit a nine-year high at 7.56%.
Ahsan H Mansur, executive director at Policy Research Institute (PRI) said: “Deposit growth is not bad. but it does not look like it is going to be good in the next fiscal year. People’s savings are declining owing to rising inflation, which may continue next year. In this situation, if the government borrows so much in the new fiscal year, the private sector’s credit flow may be disrupted.”
However, he thinks if the rate of deposit savings spikes more than the nominal GDP, it will also be a good sign for the economy.
Ashikur Rahman, a senior economist at the Policy Research Institute (PRI) and a member secretary of Bangladesh Economists’ Forum (BEF), told Dhaka Tribune: “Perhaps, the most evidence-based means to contain inflation, which has almost always worked over the last one hundred years is to raise the interest rate, which dampens excessive demand due to additional liquidity as a result of prior monetary stimulus. Even when it has been branded as a cost-push phenomenon, the excessive money supply has almost always coincided with upwards inflationary pressure.”
“As the pressure on our foreign reserve increases due to rising demand for US dollar resulting from increased import expenditures, it is essential Bangladesh Bank revisits its policy on the interest rate which is currently at 9%. I understand and appreciate the policy commitment of GoB to keep a broader interest rate in single digit (9%).”
“In this context, however, it might be possible that – while we keep the interest rates for term loans, working capital loan, home loan etc. at 9%, but increase the interest rate on Letter of Credit (LCs) to 12% or more – which will partially offset the excessive pressure on our foreign reserves. Introducing a separate but higher interest rate for Letter of Credit (LCs) only – while keeping all other interest at 9% might offer some support to our foreign reserves and ease the current pressure on the balance of payment,” he added.
Bankers say that bank deposits are rising due to the rise of the middle-income class and the expansion of the workforce.
“The middle-income group is on the rise and it is one of the key reasons,” says Syed Mahbubur Rahman, managing director and CEO at Mutual Trust Bank (MTB).
It also indicates the rise in working forces and formalization of the economy, he adds.
On the other hand, non-performing loans (NPL) have reached Tk1,13,441 crore by the first quarter of 2022, which is just short of Tk2,847 crore to reach the amount of the country’s highest-ever defaulted loans.
In September 2019 default loans amounted to Tk116,288 crore and Tk95,085 crore in March 2021.
(DT)
