The narrowing gap between deposit rates and the rate of inflation is casting a dark cloud over the economy.
Low return on deposits discourages depositors from putting their money in the bank out of fear that high inflation will cause them to lose in real terms.
Currently, the average deposit rate is around 7% and inflation in September was 6.24%.
Ten of 30 publicly listed private commercial banks have cut their interest rates for deposit products in October, according to their websites.
“This is a problem for the economy,” said Mirza Azizul Islam, former finance adviser to the caretaker government.
He said if interest rates drop to the level of the rate of inflation, depositors will get zero return on their deposits. “This will discourage depositors from keeping money in the bank.
“In that case, the banks could find it difficult to maintain the ratio between credits and deposits, which will ultimately affect trade and investment.”
Policy Research Institute Executive Director Ahsan H Mansur said: “The current level is okay in relative terms but not okay in absolute terms.
“At least a 1% return on deposits should be ensured for the interest of investors.”
The sale of deposit products has dropped between 5% to 10% across banks, according to several bankers.
Branch manager at Eastern Bank Limited Muhammad Mehedi Hasan said: “We have been experiencing a drop in the sale of deposit products in recent months.”
“Most banks have limited options but to cut the cost of funds,” he added.
Several other banks have also cut lending rates but the initiative has failed to spur an appetite for credit in the economy.
The yearly growth rate of private sector credit stood at 12.69% as of August. In turn, many banks are keeping their excess liquidity with Bangladesh Bank at a rate ranging from 5% to 8% depending upon the tenure of T-bills.
The ongoing slump in demand for credit could prompt further cuts in deposit rates, while the recent government staff salary hike could fuel inflation in the days to come.
This creates scope for interest rates and inflation rates to become level.
Falling deposit rates drive investors towards the near double-digit returns of government savings certificates.
The government offers more than 11% return on various savings instruments.
The higher return from savings certificates has caused them to sell like hot cakes despite a recent interest rate cut.
The net – total outstanding – investment in savings instruments increased to Tk109,800 crore in the year to August, a sharp increase of over 36% from a year earlier, according to Bangladesh Bank.
Islam said: “This will be a heavy burden for the government. It could find itself in a difficult situation managing fiscal deficit if the sale of savings instruments with double-digit interest rates continues to grow.”
He said since there is no ceiling on the sale of government savings instruments, the government is bound to sell it to the people.
Returns on particular savings certificates are higher than the lending rates of loan products offered by some commercial banks, accumulated data shows.
Mansur suggested lowering savings instrument interest rates further to protect deposit interest.
Neighbouring countries India, Pakistan and Sri Lanka have all experienced low-level inflation and interest rates in recent times, according to data obtained from their respective central banks.
