The Bank of Bangladesh (BB) yesterday asked banks not to set interest rates on fixed-term deposits below the inflation rate as it yields negative returns for savers.
The weighted average interest rate on deposits stood at 4.13 percent in June, while the average inflation rate was 5.56 percent, according to data from the Bangladesh Bank and the Bangladesh Bureau of Statistics (BBS).
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As a result, depositors face negative savings returns, discouraging people from parking their savings in banks.
BB said a portion of savers, including smaller ones, depend on interest income from bank deposits. As banks offer interest rates below the inflation rate, savers’ purchasing power has declined, he said.
“This in turn affects them,” BB said in a circular.
The move, however, drew criticism from bankers and analysts, who said BB should proceed with extra liquidity from the banking system.
Currently, most banks offer a 2% to 4% interest rate on fixed deposit receipts (FDR), which results in a negative real interest rate of 2% to 3% for savers.
The situation of savers who have kept their money in savings accounts is more serious than that of depositors who have opened FDRs as many banks offer less than 2 percent interest on previous products.
BB said depositors were losing interest in parking their savings in banks, leading to a trend towards investment in non-productive sectors, he added.
If the interest rate falls to a very low level, there may be a negative impact on the flow of deposits to banks in the future, which may lead to a mismatch of assets-liabilities.
In its announcement yesterday, BB said that the inflation rate should be taken into account when setting interest rates on fixed-term deposits with periods of three months or more to protect depositors’ interests and prevent imbalances in E-banking liabilities.
The interest rate for any advance payment held by individuals and public and private organizations as a provident fund and for the payment of pension benefits can not be set below the inflation rate, the central bank said.
However, BB kept the maximum interest rate on loans at 9%.
Ahsan H Mansur, executive director of the Institute Research Policy Policy in Bangladesh, criticized BB’s move.
“Ultimately, this will not benefit depositors. Banks will remain shy about accepting deposits with various excuses, as long as they have excess liquidity,” he said.
Instead of such arbitrary administrative measures, the Bank of Bangladesh should aggressively scan for excess liquidity and work to reduce inflation, he said.
“This policy in the midst of high liquidity and inflation will force banks to find ways not to accept time deposits. Deposits will be moved to high-risk non-bank financial institutions, which are hardly regulated at all,” he said.
“The money will also be transferred to for-profit activities,” Mansur said, adding that BB should have consulted stakeholders and made a proper risk assessment before issuing such a directive.
Syed Mahbubur Rahman, CEO of Mutual Trust Bank, said BB could have been monitoring the financial sector for some time before making the decision.
The central bank will wipe out excess liquidity from today as deposit rates may rise automatically.
That would be the best option if the central bank makes the decision after withdrawing some funds from the banks, Rahman said.