Sales of savings tools beat target

Sales of savings instruments in the first 10 months of the fiscal year overshot the government's full-year target by more than two times thanks to the substantially higher returns offered by the investment tool.

The government had intended to sell saving instruments amounting  to Tk 19,610 crore during the course of the fiscal year but in the July-April period it ended up selling Tk 42,098 crore, up 59 percent year-on-year. The flood of money into the investment tools kept the government away from borrowing from the banking system.

The government's borrowing from banks has been in the red, posting negative growth of 8.93 percent in March against the target of 16.1 percent set for June.

The government plans to cut the rates on saving tools to lessen the debt burden. In various pre-budget discussions, Finance Minister AMA Muhith hinted at cutting the rates to align them with the banks' lending rates.

Currently, saving instruments maturing in five years offer the highest 11.52 percent interest rate whereas the average deposit rate in the banking sector is 5 percent.

A saver gets a monthly return of Tk 916 against an investment of Tk 1 lakh whereas banks give a maximum Tk 200 to Tk 300 after deducting all charges and taxes. In some banks depositors barely get any return from their deposits.

The news of the interest rate cut prompted buying spree of saving instruments. The sales of saving instruments soared 35 percent year-on-year in April.

The rate on saving certificates will be cut as the current rate is “absurd” in comparison to the market rate, Muhith told reporters on Saturday. The government's target for interest payment was Tk 32,863 crore in 2017-18. It plans to spend Tk 42,646 crore for interest payment in the upcoming fiscal year, according to a finance ministry source.

The borrowing target from saving instruments will be set at Tk 25,828 crore in 2017-18.

Biru Paksha Paul, former chief economist of Bangladesh Bank, said a cut in interest rate on saving tools would be a welcome move that will fix the distortion in the market.

He said savers would not be much affected as the reduction will not be significant. The decision will however have a long-term impact in the economy as it would reduce the government's debt burden, he added.

If the rate is cut some savers will be deprived of the lucrative returns since there is no alternative risk-free option to invest, said Mohammed Nurul Amin, managing director of Meghna Bank. “Though the government is spending more against savings instruments the ultimate beneficiary is the country's citizens. So, the government can do it,” he said.

The veteran banker said the inflation rate should be covered by the savings rate. Otherwise money could be diverted to risky investment tools.  

Golam Hafiz Ahmed, immediate past managing director of NCC Bank, said any rate cut will cause sufferings to a certain income groups who bank on the returns from the savings.  He said the cut may bring some money to the capital market. At the same time, deposits could divert to informal sectors.

At the moment, saving instruments is the only safest investment tool as banks offer very low deposit rates, according to Ahmed.

“Cooperatives, NGOs, local merchants and non-banking financial institutions will get a chance to pull savers by offering higher rates. But there will also be risk of being cheated,” he said.