Originally posted in প্রথম আলো on 14 December 2022

People incur loss depositing money in banks

The government cemented the interest rate at 9 per cent when experts are in favour of its revision. 

The depositors are now counting losses from their savings in the banks as inflation peaked at a much higher level than the interest rate.

It squeezed the people’s actual income and made the bank deposit nothing but a loss project.

The people here have a low-level trust in the banks. The trend of saving would go down further if the depositors incur losses from their savings.

Several global surveys showed that the people generally do not keep their savings in the bank during trying times. They rather increase their investments in non-productive sectors, like land and housing, which intensify the economic crisis.

The scenario has been created here mainly due to the nine and six per cent interest rate. The government had fixed the interest rate on loans at 9 per cent at the beginning of 2020 and it remained the same till the date.

Meanwhile, a big crisis emerged in the global economy and countries all over the world, except for a few like Turkey, have raised the interest rate to rein in inflation. But Bangladesh is yet to revise the rate and make any change into it.

The loan interest rate was lowered mainly to entertain the desire of some businesses. It made the borrowings cheaper and increased the injection of money despite high inflation. Also, the loans are being granted in favor of shell companies – where a large portion is being defaulted while the remaining amount is being laundered abroad.

The noted economists and experts, against such a backdrop, believe that there is no alternative to raising the interest rate and said now is the time to pull up the rate. But the government is adamant in its position as a section of the policymakers think a high interest rate to be detrimental to investments.

Also, there are dissidents in the government as the state minister for planning, M Shamsul Alam, spoke in favor of hiking the interest rate.

Sources said the interest rate was lowered to entertain the businesses and the government is not interested in adopting a different method a year before the general election.

How the people are loosing
The actual interest rate turns negative when the interest rate surpasses inflation. The economic theory came true for Bangladesh as the country witnessed inflation 0f 9.10 per cent in September when the weighted average interest rate was 4.09 per cent.

It means a depositor experienced an interest rate of 5.01 per cent in negative in the month. Simply put, a bank deposit of Tk 100 will actually be Tk 94.99 after one year. Here, the actual interest rate plunged and inflation ate up Tk 5.11 of the deposit.

Misery does not end here as a depositor has to pay 10 to 15 per cent in tax on his interest income. So, the actual income eventually falls further. Inflation subsided slightly in November and the situation remained almost the same.

What about the banks?
The banks have also been in a tight corner over the interest rate. Analyzing the data of 13 good-performing private banks, it was seen that they maintain a very low interest rate for one-month fixed deposits. Even there are banks who pay as low interest as 1 per cent on deposits. However, the average interest rate in the banks remains between 2 and 3 per cent while the rate is more than average in two banks.

The fixed deposits in the banks mostly have maturity terms of three to six months or one year. The interest rate here ranges from 6 to 7 per cent.

Also, there are savings deposits where the interest rate generally ranges from 1.5 to 3 per cent. Only two banks provide interest more than the average rate on deposit accounts.

Most of the banks spend 3 to 4 per cent to attract the deposits. It means a bank spends Tk 3 to 4 to collect a deposit of Tk 100. Only 1 out of the 13 banks spends less than 2 per cent on deposit collection.

The banks also have to pay interest on deposits, alongside the collection cost. Adding more to the woe, they are not getting back a large portion of their lending. So, the banks turned to the interest-free income, which pushed up their other service charges.

No interest in saving
Many have withdrawn their deposits throughout the last one month as they no longer have trust in the banks. Also, many are encashing their savings to meet family expenses amid high inflation.

To some extent, various rumours and panics are prompting the depositors to pull out their money from the banks. Prime minister Sheikh Hasina asked to stop the rumours and the central bank issued a circular asking the depositors not to be panicked.

Meanwhile, the recently departed principal secretary of the prime minister’s office (PMO), Ahmed Kaikaus, told a seminar last week that the depositors had withdrawn Tk 500 billion from the banks. However, the money eventually came back to the Bangladesh Bank, he claimed.

The economists believe that the authorities should provide incentives to persuade people to save. Incentive is even more crucial in bad times.

But the depositors are now being kept away from the bank, through a lower interest rate than inflation. A discourage in saving means low investable capital in the economy. And if the deposits decrease, the liquidity crisis will increase in the banks. It brings about a decline in production or business activities and the recession prolongs.

Ineffective monetary policy
At present, inflation has become the biggest problem of global economy. Countries are desperate to control inflation and eager to cut currency supply to markets. Central banks are using monetary policy in various countries to raise interest rate.

Several countries took alternative ways. Turkey president Recep Tayyip Erdoğan, for example, thinks interest rate cut is the solution, not a rise. So, the central bank of Turkey is cutting interest rate under his pressure and Recep Tayyip Erdoğan sets a target to bring down interest rate to 9 per cent by this year.

Japan did not also slash interest rate. Its basic policy is to keep interest rate at zero and they are still holding onto it. Yet, inflation rose by a 0.5 percentage to 3.7 per cent in a year. Russia, which has already been in crisis, also cut interest rate, inflation rising to 12.6 per cent in the country.

And, Bangladesh becomes another exception. According to Economics theory, use of momentary policy is the best effective means to control and central bank does this work independently, but Bangladesh Bank has kept its best tool ineffective willingly, thus, various crises arise. Previously, Bangladesh Bank also created problems keeping value of taka unchanged forcefully.

Then and now
The central bank fixed interest celling in April 2020. At that time, inflation rate was 5.96 per cent. Bangladesh Bank also issued a circular in August 2021 stating that interest rate on deposit for three-month term or more will not be less than the rate of inflation.

The central bank also instructed the banks to consider average rate of inflation for previous three months while fixing interest rate. At that time, inflation was a little over 5.5 per cent in the country. Since inflation is 8.85 per cent now, the central bank’s instruction has largely been ineffective and banks are not following it.

What to do
Centre for Policy Dialogue (CPD) distinguished fellow Mustafizur Rahman thinks it is not always right that interest rate will remain same all the time. Rather it was right when interest was slashed during the low inflation. But at present, actual income of depositors has turned negative amid rise in import and domestic inflation. As a result, people’s interest in deposits decreases and the entire issue must be reviewed, he added.

Mustafizur Rahman further said, “Interest rate on deposit and loan should be increased simultaneously, fixing deposit interest rate at 9 per cent and loan interest rate at 12-13 per cent. This will have an impact on investment and we have to accept it amid the prevailing situation.”

“Interest rate is one of many prerequisites for investment. Besides, investment growth depends on many things. So, other cost of business operation will have to be reduced and barriers to business will have to be removed. Many problems will arise if interest rate remains same. For example, we had to suffer from outcome of keeping exchange rate unchanged. It is necessary now to adjust interest rate with market and inflation,” he advised.