A government move to reduce the interest rate of most national savings certificates will hit low and middle-income households hard.
Low and middle-income households prefer savings certificates because they are secure and offer higher rates of interest than bank deposits do.
Savings certificates are widely regarded as risk-free investments because they are backed by the state.
On May 23, the government reduced the interest rate of most national savings certificates by up to two percentage points. The interest rate of the five-year Wage Earner Development Bond was left unchanged.
The official gazette of the decision was published on June 10 by the Finance Ministry’s Internal Resources Division (IRD). The new rates are applicable only to instruments sold after May 23, 2015. Those sold earlier will retain the previous rates.
Signed by IRD Chairman Nojibur Rahman, the gazette amended the interest rate for investments under the Sanchayapatra Rules, 1977 (Amendment up to February 2012); the Family Savings Certificate Rule, 2009; the Pensioners Savings Certificate Policy, 2004; the Post Office Savings Bank Rules and the Wage Earner Development Bond Rules, 1981 (Amendment up to 30 June 2012).
The interest rate was reduced to 11.52% from 13.45% for the five-year Poribar Sanchayapatra and the rate of the five-year Pensioner Sanchayapatra was reduced to 11.76% from 13.19%.
The three-year Post Office Sanchaya- patra rate was reduced to 11.28% from 13.24% and the five-year Bangladesh Sanchayapatra rate was reduced to 11.28% from 13.19%.
The interest rate of the three-year Sanchaypatra paying quarterly profits was lowered to 11.04% from 12.59%.
“This new decision might discourage some small and middle-income investors,” said Shariful Islam, who holds Bangladesh Sanchaypatra certificates.
For the five-year Bangladesh Sanchaypatra, investors will get 9.35% in interest, down from 9.20%, on completion of the first year. But they will witness reduced interest from the end of the second year until the instrument reaches maturity.
“The Post Office Savings Bank has always been a safe place to save for mid-income people. The decision is discouraging but I think most people will still invest in savings instruments because the interest rate on bank savings deposits is very low,” said Rezaul Karim, who saves with the Mohammadpur Post Office in the capital.
At the Post Office Savings Bank, the interest rate is now 11.28%, down from 12.40%.
Finance Ministry officials said the decision was both timely and required.
Finance Minister AMA Muhith earlier said the government’s debt burden would increase and create trouble for fiscal management if the interest rates of savings certificates continued to be very high.
“People do not deposit their money in the banks because the interest rate is below 8%. Many banks have already reduced their interest rates on deposits after the government slashed interest on savings tools.
“People will still choose savings instruments because the other options are not as profitable,” said a Finance Ministry official.
The government has also made changes to year-wise profit rates and denomination-wise profit rates for savings instruments.
All but one of the savings instruments saw an interest rate cut - the Wage Earners Development Bond, which can only be purchased in foreign currency by Bangladeshi nationals working abroad, remains unchanged.
Mahmuda Akhter Mina, the director general of the Department of National Savings, when asked whether the rate cuts would hinder the saving rate, said: “It will take at least one quarter of the coming fiscal year to determine the impact of the decision.”