Bank interest rates vs savings certificates

The government is yet to reduce the rates of savings certificates fearing public backlash ahead of the general election. Earlier, it announced a plan to reduce the interest rates of savings certificates and the central bank had also advised to do so. But the government has opted for not to reduce the rates, and instead, it has formed a committee to examine various aspects of reducing interest rates.
During the current financial year the government had a borrowing target of TK 301.50 billion (30,150 crore) much of which would be spent for debt servicing an amount of TK 197 billion (19,700 crore) for interest payment.
Government borrowing through savings certificates is increasing every year. People are buying more savings certificates because of low deposit rates in banks.
Average rate of interest on bank deposits is 5.0 per cent but interest rate on savings certificates varies from nine and half per cent to eleven and half per cent.
Interest rates on all savings certificates were reduced on May 10, 2015. Interest rate on five-year savings certificate was reduced to 11.6 per cent from 13.19 per cent. Interest on three-year savings certificate was lowered to 9.8 per cent from 11.8 per cent. Other interest rates were lowered by one and half per cent.
During the first six months of the current financial year net income from savings certificates stood at TK 238.23 billion (23,823 crore) which is 1.5 per cent higher from the same period of the previous year. This fund is deposited in government exchequer for bearing the expense of government programmes. It is believed that the government borrowing target of TK 301.50 billion (30,150 crore) will be exceeded substantially.
In the previous year, the target of sale of savings certificates was TK19,610 billion (19,610 crore), and later it was revised to TK 450 billion (45,000 crore) but finally the sale was Tk 750 billion (75,000 crore).
In the current year, domestic borrowing has been fixed at TK 603.52 billion ( 60,352 crore) out of which TK 282.03 billion (28,203 crore) will be collected from the banking system. The sale of savings certificates is growing due to high interest rates. Besides, it is being considered as safe investment.
There is good news for the depositors. Interest rates on deposits have started rising from the beginning of the year. Because of high demand for loans, banks need to attract more deposits. In order to meet the requirement of funds, banks have increased interest rates from 2.0 to 4.0 per cent. Depositors used to get 13 per cent interest rates five years ago, but it declined over the years. The average rate of interest on deposits was 5.0 per cent in November last year.
Flow of loans has increased by 18 to 19 per cent from the beginning of this year and the volume of deposits has increased by 10 to 11 per cent. As the growth of loan is higher than the deposit, excess liquidity in the banking system is going down.
In the last September liquidity stood at TK 921.68 billion (92,168 crore) which was TK 1,253.11 billion (1,25,311 crore) at the same time of the previous year.
As general election will be held by the end of this year, the Bangladesh Bank is in favour of lowering the growth in bank lending but commercial banks are in favour of higher loan disbursement. Commercial banks need more funds to raise its lending and that is why they are increasing interest rates on deposits to attract the depositors. In the meantime, state-owned banks and private sector commercial banks have increased interest rates on deposits.
With the increase in interest rates on bank deposits, sale of savings certificate is likely to come down. Having bank deposits has an advantage compared to having savings certificates. Deposit can be withdrawn any time but savings certificates are for a fixed term.

The writer is an economist and columnist. [email protected]