Declining deposits worry banks

Banks are in desperate want for deposits as savers are showing unwillingness to park their funds in the banking system due to negative returns once inflation and tax are taken into consideration.

Unexpected interference of private banks' directors in setting the interest rate -- 6 percent for deposits and 9 percent for lending -- and a much higher yield on savings certificates were the main reasons for the waning deposits.

The central bank in the monetary policy for the second half of the fiscal year also pointed out the banks' struggle in attracting deposits.

Banks' deposits grew at 9 percent in December last year in contrast to 10.22 percent a year earlier and 13 percent in December 2016.

“The ceiling on interest rate has played a vital role in shrinking the deposit base,” said Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh.

The rate should be determined by the market for the sake of a sustainable economy.

“The real income of depositors has gone negative once inflation is taken into account. This is not expected,” said Rahman, also the managing director of Dhaka Bank

The weighted average interest rate on deposit was 5.26 percent in December last year, down from 5.30 percent a month earlier. On the other hand, inflation stood at 5.35 percent in December.

In other words, if a depositor keeps Tk 100,000 at a bank for one year, he/she will get a maximum of Tk 5,300 as interest earnings on the deposit.

And after deducting tax at 15 percent, the amount comes down to Tk 4,505, meaning the net interest income stands at only 4.50 percent.

If the depositor is a taxpayer with an electronic tax identification number, he/she will pay 10 percent tax and his/her net interest income will be Tk 4,770, or 4.77 percent a year.

Ahsan H Mansur, executive director of the Policy Research Institute, also attributed the decline in deposits to the lower interest rate.

“There is no problem if the interest rate on deposit remains low, but it should be higher than the inflation rate,” Mansur said.

Lending to the private sector would be hurt if the depositors turn their eyes away from banks.

He went on to call for readjustment to the interest rate on savings tools in line with the banks' deposit rate with a view to curbing the excessive investment in the instruments.  

“If the national savings tools offer interest rate in the range of 11.04 percent to 11.76 percent, why will savers park their money in banks for 5 to 6 percent only?”