Savings certificates choke bond market

The high interest rates on government savings certificates are deterring the development of a much-needed bond market and turning investors into savers in Bangladesh, experts said.

Bangladesh Bank Governor Fazle Kabir also pointed out the matter while announcing the monetary policy on Sunday.

Yet, there has been no action from the government to adjust the interest rate, for which its liabilities are swelling every year.

The continued high interest rates on savings certificates hold back the development of a bond market, said Anis A Khan, managing director of Mutual Trust Bank and chairman of the Association of Bankers Bangladesh.

“As long as this distraction remains, the bond market will remain damp,” he added.

A bond is a debt instrument issued for a specific period of time for the purpose of raising long-term capital.

It can be issued by the government, corporate and other large enterprises to meet their long-term financing needs against fixed interest rates.

Bond as a security is also considered safer than stock for a risk-averse investor as it pays both principal and a certain percentage of interest.

The bond market in Bangladesh is dominated by government treasury debt securities, with only a few from the private sector in the last one decade.

About 70 percent of the domestic savings are held in the form of bank deposits and the remaining 30 percent are in the stock and debt markets, according to market players.

Bonds are tradable in the secondary market, but transactions depend on the existing interest rates in the market.

Currently, bonds yield 5-7 percent depending on the tenure, while banks offer 5-6 percent for fixed deposits. The call money rate has been hovering around 3.5 percent for over a year.

On the other hand, the government savings schemes for five years offer about 11.50 percent, meaning the gap between savings certificates and other investment tools stands at 5-6 percentage points.

“The gap is so high that the development of a bond market is not feasible here,” said Mirza Elias Ahmed, deputy managing director of Jamuna Bank.

There is no reason that an individual or an institute will opt for a bond leaving behind the lucrative rates on savings certificates, he added.

Biru Paksha Paul, immediate past chief economist of the Bangladesh Bank, termed the interest rates on the government savings tools 'abnormal'.

Paul said the beneficiaries of savings schemes are the wealthy segment of the society. “When the government savings schemes are far more lucrative, why will people invest in bonds?”

A rush for investment in savings has also fuelled the government interest payment liability, Paul added.

In India, the return on 10-year savings certificates is only 50 basis points above the 10-year benchmark bond yields.

The government paid Tk 33,000 crore as interests in fiscal 2015-16 and the figure may soar to Tk 40,000 crore this year, as people continue to park their funds in savings certificates, according to data from the finance ministry.

Over Tk 20,319 crore worth of savings certificates were sold in the first five months of the fiscal year, up 79.4 percent year-on-year.

The Centre for Policy Dialogue, a civil society think-tank, said the government should adjust the interest rates on national savings certificates in line with those on bank deposits to bring down the debt servicing liabilities.

A Bangladesh Bank official, however, said they are trying to make the bond market vibrant by bring in some changes such as introducing online trading instead of over-the-counter transactions.