For the past five years, 65-year-old Nesar Uddin has been covering all of his daily expenses with the interest earned on his savings.
On retiring from service in 2011, he had placed his pension in a bank as a Fixed Deposit Receipt (FDR).
But when Nesar wanted to transfer his money into another FDR when its five-year term matured in May, he was shocked to discover the available interest rate had almost halved.
“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.
“People like me do not have enough options for savings. We usually put our money in a bank, rather than any other financial institutions.”
Just like Nesar Uddin, a significant number of middle and lower-income people who are dependent on interest payments from banks are facing financial difficulties due to the ever-decreasing rates offered on bank deposits.
According to the latest Bangladesh Bank report, the average interest rate on bank deposits in June 2013 was 8.54% but by June of this year, this had fallen to only 4.84%.
The real terms value of bank deposits have also been affected by the rate of inflation. At the end of June this year, the inflation rate stood at 5.94%, down from 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 that the savings environment was not helpful for depositors.
“The inflation rate is above the interest rate on bank deposits (and) 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 said.
He suggested that the interest rate on bank deposits should be increased to support the middle and lower-income class people.
Bank officials and experts in the sector identified several factors for the decreasing interest rate when contacted by the Dhaka Tribune.
Some of the key factors given were the sluggish growth of private sector credit, reduced lending rate, the government’s dependency on national savings certificate (NSC) sales, the pressure of excess liquidity, and non-performing loans (NPLs).
According to the Bangladesh Bank report, the credit disbursed to the private sector was around a quarter of the total loans made five years ago, which had dropped to 15.66% at the end of fiscal year 2016-17.
The report further revealed that 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 a 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 that there is a demand from businesses to reduce the interest rate for loans.
“The interest rate for deposits has to be reduced, as we have improved in the macro-economic indicators,” he said.
“Our foreign reserve is good and the inflation rate has decreased. 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.
“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 Ban, said 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,” he told the Dhaka Tribune.
The increasing pressure on bankers to reduce the interest rate on loans is causing them to reduce the interest rate on savings, according to BIBM Director General Toufic Ahmad Choudhury.
“This 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),” he said.
Bangladesh Bank Executive Director Subhankar Saha said the deposit interest rate for the banks depends on the open market economy.
“The deposit interest rate must be set accordingly, to keep both the bank and the depositor in mind,” he said.
“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 in January 2012 to halt reducing the rate of interest on savings.”
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,” he said.
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.”