Deposit interest shouldn’t go below inflation rate: Bangladesh Bank

Bangladesh Bank (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 per cent in June while the average inflation rate was 5.56 per cent, showed data from Bangladesh Bank and the Bangladesh Bureau of Statistics (BBS).

As a result, depositors are facing a negative return on savings, discouraging people from parking their savings in banks.

The BB said a section of savers, including smaller ones, depend on interest income from deposits in banks. As banks are offering interest lower than the inflation rate, purchasing capacity of savers was going down, it said.

"This in turn affects them," the BB said in a circular.

The move, however, attracted criticism from bankers and analysts who said the BB should instead go for mopping up excess liquidity from the banking system.

Currently most banks offer an interest rate of 2 per cent to 4 per cent on fixed deposit receipts (FDRs), which result in a negative real interest rate of 2 per cent to 3 per cent for savers.

The plight of the savers who have kept their money in the savings accounts is more severe than that of the depositors who opened FDRs as many banks provide less than 2 per cent interest on the former products.

The BB said depositors are losing interest in parking their savings in banks, leading to a tendency to invest in unproductive sectors, it added.

If the interest rate declines to a very low level, there might be a negative impact on the flow of deposits to banks in the future, which may result in an asset-liability mismatch.

In its notification yesterday, the BB said the inflation rate should be taken into account during the determination of interest rates on fixed term deposits with periods of three months and above to protect the interest of depositors, and to prevent imbalance of liabilities in the banking sector.

The interest rate on any fixed term deposit kept by individuals and public and private agencies as provident fund and for payment of retirement benefits cannot be determined below the rate of inflation, said the central bank.

The BB, however, kept the maximum limit of the interest rate on loans at 9 per cent.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, criticised the BB move.

"Ultimately, this will not benefit depositors. Banks will remain shy in accepting deposits on various excuses as long as they have excess liquidity," he said.

Instead of such arbitrary administrative measures, Bangladesh Bank should conduct aggressive mopping up of excess liquidity and work on reducing the rate of inflation, he said.

"This policy amid high liquidity and inflation will force banks to find ways not to accept term deposits. The deposits will move to high risk non-bank financial institutions, which are hardly regulated," he said.

"Money will also move to speculative activities," said Mansur, adding that the BB should have consulted stakeholders and carried out proper risk assessment before issuing such a directive.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the BB could have observed the financial sector for some time before taking the decision.

The central bank will mop up excess liquidity from today as interest rates on deposits may increase automatically.

This will be the best option if the central bank takes the decision after withdrawing some funds from banks, Rahman said.