Govt cuts interest rates of savings tools

The government has cut the interest rate on savings certificates and wage-earner bonds by 1 to 3 percentage points – a move that may help the authorities save but hurt the middle-income group dependent on the returns to make a living.

The new rates will not affect the present investment and will only be applicable for fresh investments.

According to the new rules, which came into effect yesterday, the higher the investment amount, the lower the returns will be. If the investment amount is higher than Tk 15 lakh, investors will get a lower interest rate, according to a circular of the Internal Resources Division (IRD) of the finance ministry.

The decision will hurt middle-income savers like Rezaul Islam.

The private job-holder had planned to keep all of his retirement benefits in savings certificate as private-sector employees in Bangladesh don't get any pension benefit.

"I'm worried."

He said an investment amount that would provide a monthly income of up to Tk 40,000 from savings certificates should not see any rate cut so that people like him could depend on them.

The five-year savings certificate will yield an interest rate of 10.30 per cent from 11.28 per cent now if the investment amount exceeds Tk 15 lakh.

For an investment over Tk 30 lakh, the interest rate has been fixed at 9 per cent.

The rate for the three-month profit-based savings certificate is 11.04 per cent. But, again, if the investment is higher than Tk 15 lakh, the rate will slip to 10 per cent, and a savings of Tk 30 lakh will fetch 9 per cent.

The interest rate of the five-year pensioners' savings certificate is 11.76 per cent. Now, it will be 10.75 per cent for an investment of more than Tk 15 lakh and 9.75 per cent for more than Tk 30 lakh.

"Bringing down the interest rate on the savings certificate was not a right decision as our social security system is weak," said Zaid Bakht, a former research director of the Bangladesh Institute of Development Studies.

The decision will hurt savers, low-income groups, and the middle-class, he said.

In Bangladesh, many people depend on the income from the interest, especially post-retirement.

Some people assume that banks will not get enough deposits if the savings certificate rate is higher.

"But this is not true. When the interest rate on savings certificates was even higher, banks did not face any problem in attracting funds," said Bakht, also the chairman of Agrani Bank.

The rate cut will help the government bring down its interest rate expenses.  But Bakht believes the interest expenses could be cut by eliminating the misuse of the investment tools.

The interest rate cut will put more pressure on the savers, whose incomes have already been squeezed because of the lower rates on bank deposits. 

Since April 1 last year, banks have been giving the highest 6 per cent interest on deposits after the central bank capped the rates on loans and deposits.

In fact, the weighted average rate on deposits stood at 4.13 per cent in June, down from 5.06 per cent a year ago, data from the Bangladesh Bank showed.

As a result, depositors are facing a negative return on savings given the inflation rate of 5.64 per cent in June.

The country's top-selling family savings certificate provides an 11.52 per cent interest rate. If the investment goes past Tk 15 lakh, the rate will be 10.50 per cent, and it is 9.50 per cent for the amount over Tk 30 lakh, according to the circular of the IRD.

The rate of the postal savings bank scheme has been slashed to 10.30 per cent from 11.28 per cent for the fund amounting to Tk 15 lakh. It is 9.30 per cent if the sum crosses Tk 30 lakh.

A senior official of the finance ministry said it took the decision as people were rushing towards the savings certificates for higher returns instead of keeping the funds in banks.

In the fiscal year of 2020-21, savings certificates worth Tk 112,188 crore were sold, up 67 per cent year-on-year.

Net sales of the savings certificates were Tk 41,959 crore and its growth was 190 per cent year-on-year, according to the data of the Directorate of National Savings. This increased the government's expenditure on interest payments.

The government has set aside Tk 62,000 crore for 2021-22 to pay interest on domestic borrowings, up from Tk 58,253 crore in the previous budget.

Yesterday, the government also cut the interest rate on wage earners development bonds.

The interest rate for the new investment in wage-earner development bonds will be 10.27 per cent from 11.20 per cent if the investment amount surpasses Tk 15 lakh.

If the amount crosses Tk 30 lakh, the return will be 9.33 per cent, and in the case of investment over Tk 50 lakh, the yield will be 8.40 per cent, the IRD said.

The rate on the bonds such as the US Dollar Premium Bond and the US Dollar Investment Bond has been kept unchanged.