The fear that the sizeable cut in interest rates of deposits by banks is likely to push the potential depositors to cooperative societies and multi-level marketing (MLM) firms is very much real.
The cooperatives and MLM companies are known for their fraudulent activities and thousands have already burnt their fingers being trapped by these entities. These firms usually do promise very high return on deposits and at an opportune moment decamp with funds.
In most cases, educated people can avoid the lure of fraudulent cooperatives and MLMs. But half-educated and illiterate savers can easily be trapped by these firms.
When all banks, in compliance with the central bank directive, will start offering the maximum 6.0 per cent interest on term-deposits from April 01 next, the savers will have to either accept that rate or keep their savings under mattress at home or make risky investments in dubious companies such as MLM or so-called cooperative banks.
But, experts, at a function in Dhaka last week questioned the justification for fixing the single digit lending and deposit rates. The decision, allegations have it, the central bank had to take under pressure and pass the same on to the banks. However, it is none but the central bank will have to bear the responsibility in the event of any unpalatable outcome.
There is no denying that with the proposed deposit rates in place, the depositor will either have no return or get negative return on the money they will be putting into banks. If the official statistics concerning point-to-point inflation-- the Bangladesh Bureau of Statistics (BBS) estimated the inflation at around 5.57 per cent in January last--- is taken into account, the savers will have almost no return on their investment. However, there is scepticism about the official statistics. Some people tend to believe that the inflation rate at the moment is higher than what is officially stated.
In fact, small savers in particular are in a difficult situation. They are not left with too many options as far as investment of their funds is concerned. When banks cut interest rates on deposits, the stock market is considered to be a viable option. But the current state of that market is known to all. Who will go there to lose money?
The scope for investment in government savings tools is also very limited. So, the plight of the savers is very much real.
The central bank governor has defended the cut in deposit and lending rates saying that it has been done to boost private sector credit growth that had been on a declining trend during the last couple of years.
It is a fact that the rate of private sector credit growth declined notably during the last couple of years. It was only 10 per cent during the first half of the current financial year.
Some people tend to refer to lower deposit rates in many developed countries justifying the cut in both lending and deposit rates. There are instances where banks offer less than 1.0 per cent interest on deposits. However, that is usually done in a particular situation, not always.
But the situation is altogether different in Bangladesh. An interest rate equivalent and near to that of inflation can no way be termed depositor-friendly.
Questions are now being asked about the real beneficiaries of the lower lending rates that are being fixed at the cost of depositors. Experts claim that the actual beneficiaries of lending rate cut will be a small yet influential group of borrowers who have always been calling the shot.
It is feared that following the fixation of single-digit lending rate, smaller firms are likely to find their borrowing from banks rather difficult. The banks, it is feared, will be choosy in sanctioning new loans. In such a situation, the borrowers having the power to influence decisions will secure bulk of the bank loans.
Allegations have it that this particular section of borrowers who have managed many concessions until now, in terms of rescheduling default loans, have a role in the move to cut lending rates.
More importantly, the cut in lending rate is not supposed to increase the volume of loanable funds at the disposal of banks. Rather, the opposite might happen following the cut in deposit rates. Many depositors might find keeping their money with banks rather unrewarding.
However, it is indisputable that lending rates need to be lowered for the sake of increased investment in the real sectors of the economy. But it is better not to do it arbitrarily. Hopefully, the government has taken into cognizance the ground realities while taking its decision.
The actual problem, according to most banking experts and economists, lies somewhere else and all concerned are aware of it. The existence of a huge volume of toxic loans is the root cause of the problems facing the banking industry. As banks have a high level of sour loans, they are left with no option other than cutting the volume of lending and charging higher interests on the same.
Going by the developments that have taken place in recent years, it is difficult to say that the banks and their regulator are making genuine efforts to get banks funds from the delinquent borrowers. The concessions, in various forms that have been offered over the years to the borrowers who defaulted on repayments for years, prompt one to think otherwise.
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