Slump in interest rate on deposits worries BB

The interest rate on banks' deposit fell drastically, much to the central bank's concern.

Now, the rate of interest on savings deposit ranges from zero to 4 percent; most of the banks are giving 2 to 3 percent interest, according to central bank statistics.

If the advance income tax, excise duty and banks' service charge are taken into account, the depositors' profitability falls further. And if inflation adjustment is made, depositors do not get any profit; rather, it becomes negative.

For depositors without taxpayer identification numbers, a 15 percent tax on the interest income is deducted; otherwise, the income tax rate is 10 percent.

If the deposit amount is over Tk 25,000, Tk 345 is deducted as excise duty and VAT, with the amount increasing progressively.

The service charge varies from bank to bank. For instance, if a depositor has over Tk 20,000 with Agrani Bank, Tk 150 will be deducted as service charge. If the deposit amount is between Tk 1 lakh and Tk 10 lakh the service charge will be Tk 500.

If anybody has Tk 1 lakh as savings deposit with Agrani, the depositor will get Tk 900 a year after deducting taxes and all charges. If inflation is taken into account there would be no profit, said a manager of the state-owned bank on condition of anonymity.

If the amount is withdrawn without notice there would be no interest earning for the depositor, he said.

Meanwhile, the interest rate on fixed deposit and deposit pension schemes in many banks has come down to below 6 percent, which has prompted many to rush to buy government savings instruments.

Given the development, the Bangladesh Bank issued a notice to banks early this month asking them to keep the interest rate on deposit at a reasonable level.

"In recent times it has been noticed that the banks' interest on deposit decreased quicker than the interest rate on loans. And in many cases, it has come down to below 5 percent," according to the notice.

The severe cut in interest rate on deposit is encouraging wasteful consumption as people are put off by the idea of saving.

"If the trend continues it may create imbalance in asset and liability management in the banking and financial sector, which is not desirable," the notice added.

"There is no one to look into the interest of depositors," said Nurul Amin, managing director of Meghna Bank.

Amin welcomed the central bank directive, saying the interest rate on deposits must be higher than the inflation rate.

BB Executive Director Subhankar Saha told The Daily Star that the central bank cannot issue a direct order and hence an attempt has been made to send out a message to banks such that they consider the best interests of depositors.

On the one hand, default loans are on the rise and on the other the businessmen's pressure to reduce the rates of interest on loans has resulted in the lowering of returns on deposits.

At the same time, banks are sitting on excess liquidity due to the low investment demand -- a development that also had a part to play in the downward trend of interest rates on deposits.

To lower the interest rate on loans, the banks are taking the easy way out by slashing the interest rate on deposits, said Helal Ahmed Chowdhury, independent director of Islami Bank.

Banks should keep in mind that there will soon come a time when the credit demand will increase, given that Bangladesh is on the way to implementing large infrastructure projects.

"In such a situation, if the deposit base is lost it will be very difficult for banks to get it back," said Chowdhury, also supernumerary professor at Bangladesh Institute of Bank Management.

He went on to cite a case in the past when banks had to attract savers by offering 14 percent interest.

For cutting the lending rates, the cost of fund has to be lowered; banks should speed up realisation of default loans by forming a taskforce, he said.

Chowdhury also suggested banks should come up with new products with a view to utilising the excess liquidity.