Rush for savings certificates

As commercial banks in the country are going stingy in offering high interest on fixed deposits, people are showing more interest in purchasing national savings certificates (NSC). The reason behind this trend is higher rate of interest being offered against NSCs. Reportedly, this year sales of such certificates increased three times from that last year. While most banks are offering 3 per cent against deposits the government is offering up to 11.3 per cent interest against the national savings certificates. Therefore, it is only natural that clients would go for NSCs rather than keep hard earned money in the bank for such low benefit.  

  According to the National Savings Directorate, last year net sales of savings instruments stood at Tk 41,959.54 crore, up from Tk 14,428.35 crore in the previous FY. It appears that the government has become a captive borrower, as targets of selling savings tools often go above the estimations of the policymakers. Once budgetary targets on borrowing from the savings certificates are met, their sales should be automatically stopped to establish fiscal discipline in the economy.

It is being said by experts that as the central bank announced an expansionary monetary policy for FY2020-21 to steer the economy away from a downturn, the market experienced an enormous liquidity factor.

We recall that on August 8, the central bank had issued instructions that commercial banks will not fix the interest rate of deposits below the current inflation rate. But, despite the instruction most banks are offering paltry 2 to 3 per cent interest rates on deposits, which is far below the 5.56 per cent inflation rate as of June. On the other hand, as the interest rate on the government savings certificate is higher than that on the bank’s deposits, it enjoyed a boost in its sale. In its notification, the BB said the inflation rate should be taken into account during the determination of interest rates on fixed term deposits with periods of three months and above to protect the interest of depositors.

The central bank fears that if the interest rate falls to a very low level, it may have a negative impact on the flow of deposits to banks which may result in an asset-liability mismatch in the future.

 Experts are of the opinion that the sales of savings tools could increase more if the government had not imposed a bar to investing in savings instruments. It is worth mentioning here that in the FY2019-20 budget, the government had imposed a 5 per cent tax at source on the interest income from NSCs worth up to Tk 5 lakh and also imposed a 10 per cent tax at source for investment in schemes above Tk 5 lakh. But experts also say that the higher sales of saving certificates are creating an interest burden on the government.  

This is worth a thought that the fixed income people come mostly from the middle class who in most cases have interest on fixed deposits as the second income source. They also meet major expenses for healthcare or weddings by cashing the interest on fixed deposits. This large segment of people will suffer a lot if the interest rate comes down to 2 or 3 from 10 or 9 per cent. Even BB acknowledged this fact and accordingly instructed the banks not to lower interest rate below the inflation rate.

The idea of keeping interest rate above the inflation rate will not benefit depositors as banks will hesitate in accepting new deposits as long as there will be excess liquidity in the market. Apparently banks resisted this instruction from the BB and suggested it to go for mopping up excess liquidity from the banking system. There is another factor that needs to be looked into; discouraged depositors may move to non-bank financial institutions, taking risk on their money.