Should banks be allowed to increase deposit rates

23 February 2021

THE lowering of bank deposit rates is pushing savers towards national savings certificates as they seek higher returns after incomes were wiped out by the coronavirus pandemic. And on the frontline are families with investable funds. Sales of family savings instruments grew nearly threefold year-on-year to Tk 20,149 crore in the July-December period of fiscal 2020-21 from Tk 7,581 crore.
Many of the investors bought such certificates in the names of their spouses and children. Overall sales of savings certificates soared 60 per cent year-on-year to Tk 54,976 crore in the first half of the fiscal year. The driving factor was the 11 per cent interest offered by the government on various savings certificates. The interest rate of family saving certificates is the highest, at 11.52 per cent.
The instrument's sales soared 151 per cent year-on-year to Tk 15,059 crore from July to December. The interest rate for the certificates is 11.04 per cent. One can buy Tk 30 lakh-worth of the certificates and double that using joint accounts. The sale of savings certificates had increased even during the Covid-19 pandemic.
The spiral in sales occurred due to an opportunity to whiten black money on payment of a 10 per cent tax on the declared amount and the increased inflow of remittance from the Bangladeshi expatriates. Also the surge in remittances, which went into the purchase of family saving certificates, was yet another factor.
While buying such certificates is good for the government it is also bad as a higher rate of return has to be given. This increases the cost of borrowing for the government and also increases the overall cost of developmental projects. So essentially the government is borrowing money by taxing productive sectors.
However by forcing the banks to lend at lower rates it also discourages the growth of the financial markets. Secondary capital markets such as shares and bonds will also suffer as the public won't be as willing to buy them -- given the huge returns on government bonds. So ultimately the high rates here only serve to undermine the existing capacity of the financial markets.
There is a simple solution --- let banks under strict monitoring lend at reasonable rates and increase the deposit rates.

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