Depositors are struggling to cope with the pressure of inflation with the interest earned from keeping money in banks.
Despite rising prices of essential commodities and living costs, several top commercial banks in the country have reduced the interest rate on one-year fixed deposits to 7.5%.
Meanwhile, the inflation rate in the country stood at 8.34% last September.
In other words, the interest earned from bank deposits is lower than the rate of inflation.
After deducting taxes and other fees, the real income of depositors drops even further.
As a result, retirees, senior citizens, and families who rely on bank interest to manage household expenses are facing the greatest pressure.
It is becoming increasingly difficult for them to meet escalating costs using returns from deposits.
Moreover, even with interest payouts, the real purchasing power of saved funds is eroding due to inflation.
Banks state that while deposits have increased, the demand for private sector loans remains low.
Consequently, they hold a massive surplus of liquidity. Under these circumstances, the need to collect new deposits at higher interest rates has diminished, prompting banks to cut deposit rates.
According to bankers, several large banks have reduced term deposit interest rates twice over the last two months.
Depending on the bank, the rate cuts range from 50 to 100 basis points.
While interest rates on one-year deposits ranged between 9% and 10.15% in July, they dropped to 8.5%–9% in August.
Recently, this rate has declined further to 7.5%–8% at several banks.
Currently, Brac Bank and Dutch-Bangla Bank are offering 7.5% interest on one-year fixed deposits.
Bankers noted that this rate stands at 7.75% at Prime Bank and 7.5% at City Bank.
This means that if a customer deposits Tk10 lakh for one year at an interest rate of 7.5%, their total interest income at the end of the year will be Tk75,000.
However, with inflation running at 8.34% over the same period, this earnings level fails to preserve the real purchasing power of saved funds against the rising prices of goods and services.
When withholding tax, excise duties, and other applicable charges are factored in, the net payout drops even lower.
Fahmida Khatun, distinguished fellow at the Centre for Policy Dialogue (CPD), stated: "As interest rates drop, ordinary citizens—especially retired individuals—will come under pressure. This is because many rely on the interest earned from bank deposits to run their households. Given the current high inflation environment, reduced interest rates will create additional financial strain."
She added: "In a market-driven economy, interest rates depend on demand and supply. Banks with strong liquidity positions have lower demand for new deposits, creating scope to lower interest rates."
Former chief economist of Bangladesh Bank Mustafa K Mujeri remarked: "When public trust in certain banks leads to an influx of deposits, it is natural for those banks to lower interest rates. This is standard practice in a market-based system. On the positive side, it may create opportunities to lower interest rates on bank loans, which is favorable for businesses. However, earning lower returns remains a major challenge for depositors."
Deposits rise, credit demand lags
According to data from Bangladesh Bank, total liquidity in the banking sector reached Tk781,214 crore at the end of August this year.
Against this, the statutory minimum liquidity requirement was Tk339,260 crore, leaving excess liquidity in the banking sector at approximately Tk442,000 crore.
Despite holding such significant liquidity, banks are unable to disburse these funds as loans.
Due to weak private sector investment and sluggish business expansion, demand for credit remains low. As a result, a substantial portion of deposited funds remains idle or is invested in government Treasury bills and bonds.
Bankers reported that average deposit growth in the banking sector reached 11.96% over the first eight months of this year, with several top-tier banks experiencing growth between 15% and 22%.
Many customers are transferring funds from troubled banks into relatively stable institutions, leading to higher deposit concentrations in the latter.
Sohel RK Hussain, managing director of Bank Asia, stated that their bank's advance-to-deposit ratio (ADR) stands at around 60%. This indicates that lending remains low relative to deposits, leaving significant surplus funds with the bank.
Meanwhile, bankers noted that private sector credit growth has remained below 5% for over six months.
Reluctance among business owners to undertake new investments, elevated production costs, and high interest rates on loans are among the key factors driving this situation.
Banks cut interest rates to manage surplus funds
For banks, deposits represent a liability. Money collected from customers must be deployed via loans or investments to generate income.
When deposit funds cannot be disbursed as loans, banks must continue paying interest to customers without generating expected returns from those funds, pushing up fund management costs.
Under these conditions, banks are attempting to control expenses by cutting deposit interest rates.
A trend toward reducing long-term deposit rates is also emerging. Some banks are prioritizing three- to six-month short-term deposits due to uncertainty regarding future interest rate trajectories.
Additionally, declining yields on government Treasury bills and bonds are affecting banks' investment returns.
Yields on government securities generally serve as a key benchmark for broader banking sector rates.
When returns on government bills and bonds drop, banks adjust their deposit interest rates accordingly.
However, the scenario is not uniform across all financial institutions.
Some weaker banks continue to offer higher interest rates to attract deposits, creating a noticeable disparity in deposit rates across the banking sector.
Depositors are advised not to base decisions solely on high interest rate offers, but to evaluate the financial health and safety of the institution as well.
Will borrowers benefit from lower interest rates?
Banks argue that lower deposit rates will reduce their cost of funds, potentially opening up space to reduce lending rates in the future.
However, a reduction in deposit rates does not automatically guarantee a proportional drop in borrowing rates, as loan rates depend on funding costs, operational expenses, risk assessments, and broader market conditions.
Bangladesh Bank has also reduced its policy rate (repo rate) from 10% to 9.5% to encourage investment and credit flow. Nevertheless, weak credit demand in the private sector continues to leave excess liquidity unabsorbed.
According to economists, creating an investment-friendly environment is crucial to driving credit demand.
When business owners step forward to establish new factories, expand production, and generate employment, banks will have greater opportunities to direct surplus liquidity into productive sectors.
This would enhance bank revenues while re-energizing the broader economy.
Mustafa K Mujeri suggests that depositors may consider alternative investment vehicles, such as National Savings Certificates (Sanchayapatra) or the capital market.
However, while the stock market offers potential returns, it also carries the risk of financial loss. Therefore, funds should not be shifted into high-risk investments purely in pursuit of higher yields.
