Interest rates: Back to old ways  

Now it's bank depositors' turn to recoup their losses. They have suffered enough for more than a couple of years because of continuous decline in interest rates on deposits of all types barring the current account that carries no interest.

The return from savings deposits with banks is still in the negative territory when the rate of inflation is adjusted with interest rates offered on the same. Depositors used to suffer more in the recent past when interest rates on savings deposit hovered between 2.0 and 3.0 per cent.

The average rate of return in the case of time deposits was not anyway better. The highest rate offered by banks was around 6.0 per cent, equivalent to the officially estimated rate of inflation. However, the people who are sceptical about the quality of official statistics tend to believe that the actual rate of inflation would be higher.

As a natural consequence, the rate of growth of deposits with banking system was less than normal. Moreover, the flow of deposits varied from bank to bank. Some banks got more and some others received scanty amounts. The scams that hit the sector in recent times also made the depositors choosy, for the sake of safety of their funds. The public sector banks were at the top of the list, followed by the relatively stable private sector banks, as far as destinations of deposits are concerned.

Despite the fact that the banking sector is now experiencing liquidity crisis, some private banks with good track records do not feel the pinch, to any major extent.

Following the decline in interest rates on deposits, funds in greater volume have gone for investment in government savings tools. But the net sale of the same does not anyway match with the volume of liquidity that has remained outside the banking system. Funds have not been invested in stock market either. The situation prevailing in the stock market does amply indicate it.

So, in such a situation, one can only guess that a large volume of funds has been pushed under the mattress or taken out of the country using illegal routes.

To cope with the situation, the banks lately have made their natural move; they have raised their deposit rates. For the first time in the last couple of years, the rates on time-deposits have gone double-digit. The ongoing trend does indicate that the rates on deposits would go further up in the coming months.

In line with the increase in deposit rates, the banks have also raised their lending rates to maintain a healthy spread. In some cases, the lending rates came down to single digit in the recent past. But no bank is now offering any loan barring some selected sectors at single digit interest rates. A few banks, reportedly, are charging interests on loans at rates as high as 20 per cent.

Naturally, businesses have reacted to the reversal negatively and sought actions on the part of the government and other relevant agencies to lower the lending rates to single digit.

Prime Minister Sheikh Hasina is also strongly in favour of bringing down the lending rates to single digit. Addressing the Working Committee meeting of the ruling Awami League on March 14 last, she made her government's stance rather clear on the issue.

Finance Minister AMA Muhith also discussed the issue with the banking sector stakeholders last Friday and a follow-up meeting, according to a media report, was due yesterday (Sunday).

There is no reason to believe that bankers are deliberately keeping their lending rates at high level. Affordable lending rates are supposed to attract greater number of borrowers. But lending rates are very much linked to rates offered to depositors. In a market where liquidity is in short supply, banks would naturally offer higher deposit rates. The banks which have sufficient funds would also go by the trend and fix market-based rates in the case of both deposit and credit. It is hard to dictate interest rates in a market economy where demand and supply of funds remain the key determinants.

However, the government, the central bank and the management of a few banks have to share the blame for the latest unsavoury situation prevailing in the banking sector. One does not have to explain the reasons. The main actors should search their souls to know why accusing fingers are being pointed at them.

The financial sector by its very nature is a sensitive one and negative developments in one or two banks do affect operations of other players and there is no escape from it.

Loan scams and accumulation of huge classified loans are hurting the banking sector grievously. Banks could have earned higher profit, offered attractive rates to depositors and affordable rates to the borrowers only if all the stakeholders, including the regulator, had played by the rules. More importantly, it is good governance what matters most. Banks are no exception.

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