Finance Minister AMA Muhith, it seems, has been in a dilemma over the issue of revising downward the rates of profit offered to the holders of the government's savings tools (Sanchayapatras).
Being under pressure from two opposing groups, he could not make up his mind whether to lower the rates of profit or not.
The businesses and bankers have been demanding a cut in rates of profit through the media as well as other forums. They argue that a downward revision of the existing 'high' rates of profit of the government's savings tools is necessary for the sake of lowering the banks' lending rate and, thus, spurring rate of investment and growth.
Such high rates, according to them, have created distortions in the 'interest rate regime', leading to a marked slowdown in overall investment activities and 'outflow' of funds from the stock market.
The other group, comprising middleclass housewives, pensioners and small savers, in fact, does not have any forum wherefrom it can plead its case or highlight how important role the profit they earn from 'gilt-edged' savings tools, play in managing their daily life.
Thus, it remains the sacred duty of the power-that-be to speak for the voiceless and protect their interests. It was reported in a section of the media that a good number of cabinet members had opposed the idea of cutting yield rates of savings tools.
The bankers and business leaders do very often allege that high yield rates of savings tools are creating distortions in the money market. But how tenable is the allegation?
The yield rate of the five-year Paribar (family) Sanchayapatra at maturity stands at 13.45 per cent, including 1.25 per cent social security premium (SSP). The rate of three-year savings tool at the end of maturity is 12.59, including 0.79 SSP and that of five-year Sanchaypatra 13.19 per cent including 0.99 per cent SSP.
The proponents of rate-cut always refer to the rates given at maturity. But the comparison should be done somewhere else.
The holders of government savings tools of five or three-year maturity periods are not entitled to rates offered at maturity if they encash the same before the maturity period, they get profits at lower rates. If encashment is done before one year period, the holders get nothing.
At the end of one year period, the rates of profit given at encashment range between 9.20 per cent and 9.80 per cent.
Banks too are offering around 9.0 per cent interest at maturity of their fixed deposits of one-year duration.
In fact non-banking financial institutions (NBFIs), which are these days among the leading borrowers of scheduled bank funds, offer more than 10.5 per cent rate of interest on fixed deposits of one-year duration.
So, why are all these hullabaloos over the yield rates of government savings tools?
Since the banks are now comfortable with their liquidity situation, they are not taking fixed deposits beyond one year duration. There could be one or two exceptions. Had the banks marketed the deposit instruments of longer duration (three to five years), their interest rates, possibly, would have been higher than the rates of yield being offered to holders of government's savings tools.
One may feel tempted to ask a question: why are not small savers putting their money in fixed deposit receipts (FDR) with NBFIs?
In fact, the people who buy the savings tools, in addition to safety security concerns about their funds, want a regular and long-term return from their deposits. Housewives and pensioners constitute the largest segment of this class of savers.
What choice do the small savers have other than investing in Sanchayapatras -- the government-issued savings certificates and therefore likened to gilt-edged ones --that are considered 'safety nets' for the middle and lower middle class people in society? Is there any other alternative?
It is unlikely that they would put their money in stocks anytime soon after watching the latest mayhem at the bourses.
Moreover, there are investment ceilings for both individual and joint purchase of savings tools. In the event of lowering the rates of profit, the government would be required to revise upward the ceilings to keep the income anticipated by the investors unchanged.
The finance minister sometime back had talked about creating a national 'pension' scheme covering nearly 2.0 million private service holders. But, reportedly, there has not been any notable progress to this effect.
The effective rate of return from the savings tools or FDR with banks remains negligible after adjusting the same with the current rate of inflation.
Then again, the argument that the cut in yield rate of savings tools would spur investment and revival of the stock market, apparently, is not based on any solid evidence.
The current lending rates of the banks are far less than those used to be offered a few years back. Yet the private sector credit expansion has been lower than the targets in recent months. In addition to political uncertainty, infrastructural bottlenecks have largely been responsible for the current slow rate of investment.
It is also unlikely that any lowering of yield rates of savings tools would prompt their holders to withdraw funds and put the same in stocks. During the peak days of the bourses in 2010, many savers had withdrawn funds from savings tools and invested the same in stocks with a hope to become rich overnight. Most of these 'greedy' investors had burnt their fingers. So, getting them back to bourses again within a short period might prove to be no more as easy as before.
Besides, a section of experts have alleged that the 'rich' people are investing in savings tools to gain from high profits. The allowable individual investment ceiling of Tk. 10.5 million is a peanut for the truly rich people. They would never be interested in this kind of investment.
So, the Ministry of Finance (MoF) is expected to take into cognizance the issue in its true perspective and reach a decision that would better protect the interests of the economy and also of the small savers, the voiceless ones.
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