Savings tools: Good and evil
Shamsul Huq Zahid | Monday, 20 June 2016
The government's savings instruments, lately, have been provoking debates. Bankers and a section of economists are finding those as instruments of market distortion because of their 'high' yield rates. A few have gone far enough to question the justification of floating the savings instruments by the government.
People who have invested in the savings instruments are resentful because the government some months back had reduced the yield rates by nearly 2.0 per cent. However, the government, it seems, deliberately is not getting involved with the debate. It has been receiving funds well beyond the targets through the sales of savings tools notwithstanding the fact that the interest burden on account of such sales is becoming increasingly heavier.
Dr. Biru Paksha Paul, chief economist at the Bangladesh Bank (BB) speaking at a roundtable in Dhaka Friday last was highly critical of the yield rates offered by the government to the buyers of its savings instruments.
He felt that if the current trend continues money would flow out of banks and end up in savings instruments.
Dr. Paul's worries are genuine for the interest rates offered to depositors these days by banks are quite low compared to the rates of yield given on savings instruments. At present the banks offer 5.5 to 6.0 per cent for deposits while yield rates of savings tools are between 11.04 and 11.72 per cent.
Under such circumstances, it is natural for the savers to invest more in the government's savings tools than keeping their money with banks.
It is also obvious that the banks will have to pay less to their depositors if they are to lend at lower rates. The banks' deposit rates have gone down in recent months remarkably, nearly by 50 per cent in the case of time deposits. The interest rates on savings deposits have been always low. It has gone down further in recent months.
But the question is: was the fall in deposit rates commensurate with that of lending rates? The average lending rate is still at double digit with the lending-deposit spread remaining above 5.0 per cent. In most other countries, the spread is between 2.0 and 3.0 per cent.
The banks have lowered their deposit as well as lending rates following buildup of excess liquidity and demand from businesses to reduce the lending rates to help spur investment in the country. But relevant statistics available with the national statistical organization do suggest that the investment situation has more or less remained stagnant. Businesses list a number of factors for this. They find the lending rates still high and refer to power and gas crisis as a great disincentive for any prospective investor.
Why are not banks reducing their spread to make their lending rates lucrative? In fact, the banks despite having all the motivation to do that are not in a position to bring down their average lending rates to single digit. Their non-performing loans remain a major barrier in this connection. Banks with a view to meeting their provisioning requirement do need to keep their profits at high level and a higher spread is necessary to ensure that. However, the problem is more acute in the case of state-owned banks where nearly 25 per cent of the outstanding loans, according to the latest central bank statistics, are classified. The situation with the private commercial banks is not that bad as their NPL is estimated at around 5.0 per cent.
So, it is clear that lowering of deposit rates has not served the purpose of attracting a greater numbers of prospective investors. Rather the depositors are affected. What the banks are now offering to depositors is almost equivalent to, or lower than, the current rate of inflation, estimated officially. There is suspicion that there could be some manipulation of relevant data in the calculation of inflation. So, the depositors are either getting nothing or negative return on their deposits with banks. In that case, why should people keep their funds with banks?
The suggestion to discontinue savings instruments by the government appears to be harsh given the country's socio-economic ground realities. The BB chief economist has suggested creation of a pension fund for the retirees as an alternative to government savings tools. It is not that only government servants make investments in savings tools. Millions of small savers including self-employed and private sector retirees, not just millionaires as suggested by Dr.Paul, are putting their money in the same.
The statement that 65 per cent of the buyers of savings instruments are millionaires deserves scrutiny for there is no way of knowing the wealth status of the buyers of instruments. Even, the banks do not ask the savings tools' buyers to submit their electronic tax identification numbers (e-TINs).
There is no denying that the facility could be abused by a section of financially affluent people. But that should not be the reason for depriving millions of small savers of the financial benefits out of their investments in a market where there exist virtually no investment options. None would surely refer to the country's stock market as an option.