Published in The Daily Star on Tuesday 18 February 2020
Postal deposit rate cuts: A blow to low-income groups
The sudden cut in interest rates on postal savings came as a bolt from the blue for many small depositors who depend largely on the interest incomes to make ends meet.
“This is shocking,” said Masud Rana after learning of the development on Thursday evening.
Rana was once a migrant worker and over the last four years he has been bearing the lion’s share of his family’s expenses with his returns from his savings account with the postal department.
He rushed to the GPO Dhaka on Sunday to find out if the rate cuts — from 11.28 per cent to 6 per cent for fixed deposits with a three-year tenure — would be applicable for his deposits as well.
After finding no clear answer he opted to liquidate his fixed deposits: until Sunday evening, he was seen waiting anxiously in a queue for a cheque as cash had already dried up amid a withdrawal pressure from nearly 50 lakh savers mostly from the low- and mid-income brackets.
The finance ministry on Thursday brought down interest rate on ordinary and fixed deposit accounts in post offices to conform to a government decision to bring down the interest rates on bank deposits and lending to 6 per cent and 9 per cent respectively.
Most banks have cut interest rates on fixed deposits schemes from the beginning of this month in line with the decision aimed at spurring private investment.
Rana, who lives with his parents at Shanir Akhra in the capital, was in a fix over where he would invest the money he had earned as a migrant worker in Saudi Arabia.
“The rich don’t keep money here. The middle-class families deposit in post offices as they offer higher interest than banks,” said Rana, father of a school-goer.
The government could have reduced the rate by 1 or 2 percentage points instead of a massive cut, added the crestfallen Rana.
“I am in a tight spot. I only see tough days ahead,” said Safatun Nesa, a 65-year-old widow from Rajshahi city and is the sole bread earner in her family.
She raised about Tk 1 lakh working as a housemaid and went for postal savings a year ago, our Rajshahi correspondent reported.
The latest interest rate cut means new savers will get 6 per cent returns at the time of maturity of their schemes. And those who will reinvest or renew their fixed deposits after the finance ministry’s notice will also get the same rate.
Fixed income people, particularly the lower-income group, will be affected the most, said Fahmida Khatun, executive director of the Centre for Policy Dialogue, a think-tank.
“The banking sector is in a crisis and giving low interest rates. The capital market is bearish. So where will the fixed income group keep their money?”
The measure will shrink the disposable income of people and have a negative impact on living standards, she said, adding that the inflation-adjusted returns from the savings will, in fact, be negative or negligible.
The blow came at a time when deposits in post offices were increasing as people found keeping money there safer and more rewarding than in banks.
Fixed deposits in post offices stood at Tk 15,500 crore in fiscal 2018-19.
Deposits jumped 66 per cent year-on-year to nearly Tk 11,700 crore in the first half of the fiscal year, according to Bangladesh Post Office data.
Fixed deposits rose after the government tightened rules for investment in savings certificates to ensure transparency in the sector, said a senior official at the Bangladesh Post Office.
However, the official said the number of rich people keeping money in post office accounts would be about 30 per cent of the total accountholders.
About 70 per cent of the accountholders here are middle-class and low-income people living mainly in the rural and suburban areas, he said, adding that they are farmers and women who prefer not to go to banks.
Officials also said high interest rates, availability of branches in rural areas, ease in opening accounts and flexibility in withdrawing deposits drew a large number of people towards the post offices.
Anyone can open an ordinary account at post offices by paying as low as Tk 10 and a fixed deposit account by Tk 100.
The finance ministry could have brought down the deposit ceiling to shut out affluent people from depositing here, the official added.
“I have no son to look after me after the marriage of my three daughters. I am now living in my village home with my husband. Savings in the post office are my main income source,” said Suchata Saha, a retired primary school teacher in Rangunia upazila of Chattogram.
The interest rate cut will only fuel withdrawal and divert fund from formal channels, encourage illegal multi-level marketing (MLM) companies and spur investment in the unproductive sectors, analysts said.
“Savers will move to alternative forms of savings,” said Mustafa K Mujeri, executive director of the Institute for Inclusive Finance and Development (InM), adding that a section may also buy land or gold.
Many pensioners and distressed women have accounts in post offices.
“And in many cases, they depend on income from savings. The interest rate cut means their income has been reduced. This has a welfare implication and effect on income distribution,” said Mujeri, also a former chief economist of the Bangladesh Bank.
The interest rate on lending does not depend only on the rate at which banks can get deposits; the other costs of banks are factored in while calculating the rate at which loans would be given out.
“We are not addressing the main reasons — the high cost of fund and default loans. There would have been long term benefits were the main reasons addressed,” he added.
Investment does not depend only on the interest rate, said KAS Murshid, director general of the Bangladesh Institute of Development Studies.
“A lot of other factors such as the business climate influence investment decisions,” he added.