Depositors losing by keeping money in banks

Keeping money in the bank to bag some profit is not the case right now.

Considering the inflation and the deposit rate, the depositors are actually counting losses as the real interest rate is in the negative, according to the latest data.

At present, the average deposit rate is 4.02 per cent while the inflation rate was at 7.42 per cent in May — which puts the real interest rate at a negative 3.4 per cent.

In numbers — if a person deposits Tk 100 in his bank account, he/she is getting Tk 96.6 back after the deposit tenure is complete.

“This simply means depositors are not earning anything by keeping money in the bank,” economist and analyst Professor Abu Ahmed told The Business Post.

Although the interest rates on loans and deposits were fixed at 9 per cent and 6 per cent, respectively, in 2019, the average interest rate has come down due to low demand during the Covid-19 pandemic. As demand for loans declined, excess liquidity increased in banks.

However, banks are now in a liquidity crisis after the economy started recovering as the pandemic situation improved and the demand for cash increased due to the dollar crisis. The call money rate has also increased recently to 5 per cent.

On the other hand, Bangladesh Bank (BB) also increased the repo rate (policy rate) to 5 per cent at the end of May to bring inflation under control.

Under the circumstances, bankers have demanded increasing the interest rates as the economy is under pressure. If that happens, the interest rate on the deposit will also increase.

Md Arfan Ali, the president and managing director (MD) of Bank Asia, told The Business Post, “We expect the interest rate to go up in the coming months. While 6 per cent deposit rate is the new normal, some banks are paying more.”

On August 8, 2021, the central bank issued a circular, stating that the interest rate on deposits should not be below the inflation rate.

BB Executive Director and spokesperson Serajul Islam said, “If inflation goes up, the interest rates on deposits will rise as per the central bank’s instructions. But we have not given any new instruction to the banks in this regard.”

When the real interest rate goes in the negative, depositors or investors usually move to the capital market. But that does not happen generally in Bangladesh, said Professor Ahmed.

“The depositors in our country are yet to become skilled investors. They don’t have the financial literacy to enter the capital market in a hurry,” he added.

Agrani Bank MD and CEO Mohammad Shams-Ul Islam told The Business Post that the recent rise in the inflation rate is largely the result of the increasing import costs.

“We are not sure whether the interest rate cap will be lifted. We are waiting and observing the situation. If the deposit rate is increased without lifting the interest rate cap, our profitability will suffer,” he added.

Meanwhile, the private sector credit growth has been on the rise since January this year since Covid cases and deaths started going down. Credit growth had reached 12.94 per cent in May, the highest in 41 months.

Bankers and economists believe this will increase the demand for money in the coming days and the interest rates on loans and deposits will rise.