Banks asked to raise interest on deposits

Bangladesh Bank has directed banks to increase the interest rate on term deposits in line with inflation.

From now on, no bank will be able to pay less interest on term deposits than the inflation rate. This instruction will apply to deposits declared for a period of three months or more.

According to Bangladesh Bank data, by the term basis, currently the minimum rate of fixed deposits is 1 per cent and maximum is 9 per cent. In the last three months (April, May, June), the average inflation was about 5.50 per cent.

Bangladesh Bank’s Banking Regulation and Policy Department issued a directive and sent it to the chief executives of all scheduled banks on Sunday.

“Interest rates on deposits and profit margins in the banking sector have been steadily declining recently. Most banks are offering interest or profit on term deposits at a lower rate than the inflation rate. This is reducing the purchasing power of small depositors who are dependent on the interest or profit of the deposits held in the bank. As a result, they are suffering,’’ the notification said.

The directive states that the interest rate on term deposits at the individual level and any amount of funds deposited to repay various dues, including provident fund, retirement dues of the employees of various government and non-government organisations, cannot be fixed in any way lower than inflation.

It said that the primary source of funds of the bank is money collected from depositors. Excessive reduction in interest rates on deposits may adversely affect bank deposits in the future. As a result, there may be an imbalance in the liability and asset management of the bank.

A review of bank statements shows that most banks are paying lower interest rates on term deposits than the inflation rate.

The purchasing power of depositors is declining as they are paid less interest than the inflation rate on term deposits.

In addition, the sharp decline in interest rates on term deposits discourages public savings. As a result, depositors tend to invest in unproductive sectors, including risky ones, instead of keeping their savings in banks.

With the coronavirus outbreak, the banks’ CRR has been reduced by 1.5 per cent, and liquidity in the market has increased due to various policy supports, including refinancing of around Tk 60,000 crore for disbursement of loans under incentives. In this regard, the central bank took this decision to protect depositors’ interests and prevent the imbalance of liabilities in the banking sector.

“This is not a good decision, and it will be very tough to increase deposit rate to 5.5 per cent,” said Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank.

“If the deposit interest rate is set in line with the inflation rate, people will switch to savings accounts from current accounts,” said Rahman, a former chairman of Association of Bankers, Bangladesh. If the rate is set at 5.5 per cent, it will cross the landing rate as there is a cost of fund management, he added.