Highlights:
- September's 8.34% inflation erodes savers' real purchasing power.
- Retirees face financial pressure as interest income declines.
- Strong deposit growth and weak credit demand drive rate cuts.
- Private-sector credit growth remains below 5% for over six months.
- Surplus liquidity pushes banks towards government securities over lending.
Savers are losing purchasing power as leading commercial banks have cut one-year fixed deposit rates to around 7.5%, well below September's inflation rate of 8.34%.
The decline means depositors are earning less than the rate at which consumer prices are rising, eroding the real value of their savings. Retirees and others who rely on bank interest to meet regular expenses are particularly exposed.
The latest cuts, made last week, were the second round of reductions in two months, with several banks lowering rates by 50 to 100 basis points. Rates have fallen from 8%-8.5%, after standing at 8.5%-9% in August and 9%-10.15% in July.
A depositor keeping Tk10 lakh in a fixed deposit at 7.5% would earn Tk75,000 in gross interest over a year, assuming the rate remains unchanged. However, that return would not preserve the deposit's purchasing power at the current inflation rate, even before taxes, excise duty and other charges reduce the net income.
Bankers attribute the cuts to strong deposit growth at leading lenders, sluggish private-sector credit demand and abundant liquidity, which have reduced the need to compete aggressively for new funds.
Economists say falling deposit rates create immediate financial strain for people who depend on interest income, especially as the cost of living keeps rising.
Fahmida Khatun, distinguished fellow at the Centre for Policy Dialogue (CPD), said the falling rates would put pressure on people who depend on bank deposits, particularly retirees.
"Retired people keep their money in banks and receive interest. When interest rates fall, it certainly creates pressure on them because inflation is currently higher," she said.
In a market-based economy, interest rates depend on demand and supply, she said. "Banks with stronger liquidity positions have less need to attract new deposits, prompting some lenders to lower their rates.
Mustafa Kamal Mujeri, former chief economist of the Bangladesh Bank, said banks receiving deposits because of greater public confidence would naturally reduce their deposit rates.
"This is a market-based practice. It is good for the country, because lending rates may come down as a result," he said, adding that lower borrowing costs could benefit businesses and the wider economy.
However, depositors would earn less interest, creating difficulties for those dependent on savings income, he added.
Mujeri said savers could also consider investing in the stock market or savings certificates. While shares may offer higher returns, he cautioned that they also carry a risk of losses.
Why banks cut deposit rates
Some of the country's largest commercial banks have reported strong deposit growth, partly as customers move money away from troubled lenders towards institutions they consider more reliable.
Bankers said deposits at several leading banks grew by 15%-22% in the first eight months of this year, compared with growth of 11.96% across the banking sector up to August.
With deposits growing faster than lending opportunities, banks have less incentive to offer high interest rates to attract additional funds. Senior executives at some lenders said they are deliberately discouraging deposits that would require them to pay relatively high interest at maturity.
BRAC Bank and Dutch-Bangla Bank are now offering 7.5% on one-year fixed deposits. BRAC Bank reduced its rate by 50 basis points over a week, while DBBL cut its rate by 100 basis points.
Prime Bank is offering 7.75%, while City Bank is paying 7.5% on comparable one-year deposits, according to rates provided by bankers.
Despite the lower returns, customers continue to place money with leading banks because they have greater confidence in those institutions, bankers said.
Sohail RK Hussain, managing director of Bank Asia, said liquidity in the banking sector was strong and the advance-to-deposit ratio (ADR) was close to 60%.
"That means huge surplus money is sitting in the banks," he said.
A senior official of a private bank told TBS that launching new businesses or expanding existing ones would remain difficult over the next year.
"Given the state of the economy, businessmen are not showing interest in new investment," he said.
Sluggish lending leaves banks with surplus funds
Private-sector credit growth has remained below 5% for more than six months, reflecting a prolonged slowdown in investment and business borrowing.
With fewer creditworthy borrowers seeking loans, banks have more funds left unused or available for investment in other assets.
Bangladesh Bank data show that excess liquidity in the banking sector stood at Tk4.08 lakh crore in June. The surplus has reduced banks' need to attract additional deposits when they already have substantial funds available for lending and investment.
Sohail of Bank Asia said corporate and small and medium-sized enterprises were operating factories at very low capacity utilisation. Higher fuel oil prices had also raised production costs, he added.
A senior Treasury official at another bank said lending rates remained high, at 10%-11%, discouraging businesses from borrowing.
"Businesses do not want to run their businesses on high interest. So, when they start borrowing from banks, lenders will be able to increase their income from lending again," he said.
Govt securities offer an alternative outlet
Banks have also been investing surplus funds in Treasury bills and bonds as weak credit demand limits opportunities to lend to businesses.
Bankers said Treasury bill rates fell to a three-year low last week amid strong demand for government securities. However, rates on 91-day, 182-day and 364-day Treasury bills rose by 32-100 basis points yesterday compared with the previous week.
Bankers said the increase could be temporary given the sluggish pace of business activity.
Yields on government securities serve as an important benchmark for interest rates across the financial system. When banks have ample liquidity and compete to buy Treasury securities, yields can fall, reducing the incentive to offer high rates on deposits.
A senior official of a private bank told TBS that the sharp increase of up to 100 basis points in Treasury bill rates was mainly due to Sonali Bank lending Tk7,000 crore to National Bank.
The official said Sonali Bank generally had a strong liquidity position at Treasury bill and bond auctions. Treasury bill and bond rates would fall once the government resumes making adjustments, the official added.
Overall, the trend in Treasury bill and bond rates remained downward, the official said.