Term deposits flowing out of banks to govt savings tools

A substantial volume of term deposits with scheduled banks is being diverted to the government savings schemes mainly because of the continuous decline in rates of interest offered by banks.
Such diversion may leave a number of adverse consequences on the economy, economists and senior bankers have expressed the fear.
Only in the last fiscal year, the net sale of national saving schemes stood at over Tk 117 billion against the target of Tk 49.71 billion. However, according to the revised budget for the fiscal 2013-14, the net sale of the same had stood at Tk 80 billion.
The commercial banks, however, do not mind the diversion of deposits as they are now awash with surplus funds.
However, senior bankers feel that the rate of interest of the national savings tools should be market-based ones to help create a level-playing field for all in the financial markets.
It is believed that many general clients of commercial banks have been withdrawing their term deposits and investing the money in national saving certificates.
However, economists fear adverse economic impact on the economy due to the presence of this type of high interest-bearing borrowing instruments in the market.
Dr. Zahid Hussain, lead economist at the Dhaka office of the World Bank (WB), said the government's interest payment will rise significantly due to the high interest being paid against savings instrument deposits.
During first 10 months of the last fiscal, the government's single largest expenditure was on interest payment which accounted for 24 per cent of its total revenue expenditure for the whole fiscal, according to the Finance Division.
"The high interest-bearing savings tools might also cause income inequality in the society as the financially solvent communities will earn more than that of the poor and low-income people," Dr Hussain said.
He also said the high interest rates of savings instrument do also discourage banks to lower their deposit rates and, consequently, their lending rates
However, bankers said such type of diversion of deposits will not cause any impact on the financial sector, at least, for sometime.
Ali Reza Iftekhar, chairman at the Bankers' Association, Bangladesh (ABB) said: "We're not worried over this type of fund shifting as we have substantial amounts of idle money."
He said the commercial banks have reduced their interest rates on deposits on the availability of adequate idle funds.
"We've reduced interest rates on deposits as well as lending over the last six months," Mr Iftekhar, also managing director at the EBL (Eastern Bank Limited), a private commercial bank.
He said funds have remained idle following squeeze in investment opportunities.
He said even six months earlier, the interest rates of the national savings tools and that of the term deposits in the commercial banks were almost the same.
The difference in yield rates of the national saving tools and the interest rates on term-deposits now stands at around 3.0 per cent.
The products belonging to the National Savings Directorate (NSD) offer profits at rates ranging from 11.0 per cent to over 13.0 per cent.
The government amended rules concerned in 2012 by enhancing the rate of interest on national saving tools.
Currently, the commercial banks have been offering interests at rates between 8.0 per cent and 10 per cent for term deposits. They offer only 4.0 per cent for savings account deposits.
Dr. Ahmed Al-Kabir, chairman at the state-owned Rupali Bank said: "The government had the necessity to resort to this type of non-bank borrowing to meet its deficit and thereby it had raised the yield rates of savings certificates."
He also said that government will have to spend a substantial volume as the savings tools are very expensive ones.
"These will affect the government in the long run," he said.
Dr. Kabir said the government wanted to contain inflationary pressures through the absorption of liquidity from the market.
Md Nurul Amin, managing director at the Meghna Bank said: "As a new bank we also are not concerned of the diversion of funds from the banks."