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The Financial Express

Cutting yield rates of savings certificates

| Updated: October 23, 2017 03:15:39


Cutting yield rates of savings certificates
The trend of investment in the country continued to remain sluggish last year despite political stability - a key factor congenial to investment. This is the general conclusion in various analyses and reviews on the country's economic scenario in 2015. In these reviews, almost everyone identified several barriers to investment. Shortage of gas and lack of uninterrupted supply of electricity were two major barriers categorically identified by businessmen and economists. High rate of interest on lending was marked as another critical impediment to investment.
In a meeting with a lead trade body few days back, the finance minister also acknowledged that high interest rate was hurting business and investment. Supporting the recommendation of the trade body for reducing yield rates of savings certificates, he said that the existing rates of interest of savings certificates (sanchyapatra) were still high requiring a reduction.
It has been argued that yield rates of savings certificates are high, and so these need to be brought down to the same level of deposit rates in banks or yield rates of treasury bills and bonds.  The logic is that lower rates of savings certificates help banks maintain lower rate of interest for deposits as well as for lending. Such demand from the business community is backed by many economists mostly aligned to the international financial institutions. 
About eight months ago, the government slashed the yield rates of all four types of savings certificates by two percentage points on average. Thus, annual average yield rate of savings certificate actually came down to single digit or close to it. The rates are, however, in double digit on full maturity. Currently, the yield rate of 5-year Poribar Sanchayapatra is 11.52 per cent, 5-year Pensioner Sanchayapatra 11.76 per cent, 3-year Post Office Sanchayapatra 11.28 per cent and 5-year Bangladesh Sanchayapatra 11.28 per cent. But, these rates are applicable only after maturity. If anyone goes for encashment before maturity, he or she will not get the profit at these rates. In fact, actual rate is below 10 per cent if encased prior to maturity. 
On the other hand, interest rates of banks' fixed deposits came down below 10 per cent level over a year ago. On weighted average, interest rate of deposits came down to 6.46 per cent in November, 2015, from 7.26 per cent in January, 2015.  Thus, there is a big gap between yield rate of savings certificates and interest rate of bank deposits. As savings certificates still provide good returns, depositors mostly count on these. 
In fact, yield rates of savings certificates are still a good shield against inflation, especially for fixed income people. Average inflation rate in 2015 came down to 6.20 per cent from 7 per cent in 2014. But return on bank deposit also came down well below 7 per cent. Thus real income shrank significantly and became almost zero. Again, weighted average lending rates also came down to 11.27 per cent in November, 2015. 
The business community is demanding that the lending rate should come down below 10 per cent or to single digit level. But banks are yet to do so although there is a huge amount of investable funds lying idle. At the end of October 2015, excess liquidity of the country's banks stood at around Tk 1217 billion (Tk 121700 crore) which was Tk 1123 billion at the end of June, 2015. The amount of excess liquidity was Tk 923.4 billion at the end of December, 2014.
So, it is interesting to observe that banks are sitting on idle money as businessmen and entrepreneurs are not going to the banks for borrowing significantly. That's why, investment is also not increasing. Now, cutting down the yield rates to push investment up - on the presumption that that lending rate would follow -- is not a well-founded argument.  Without addressing the other major barriers such as the dearth of energy, inefficiency in regulatory mechanism and corruption in service delivery, reducing the yield rates of savings certificates is not likely to bring any desired outcome. 
Both the finance minister and energy adviser to the Prime Minister recently acknowledged the problem with power supply and assured the business community that it would be fixed within two years. In such a situation, cutting the yield rates of savings certificates can do little to cause a big push for investment.   
Given the reality, if the government decides to go ahead with further cuts on saving certificates, there will be little or no option left to common people to protect themselves from inflation or any future uncertainty. With very marginal real income, they will have to look for informal avenues to park their hard-earned income for some higher return, with a lot of risk. 
 

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