Impact of lower rates on deposits: A senior citizen's perspective

The financial sector of the country has of late been struggling against severe ups & downs. As the sector is considered to be the heart of the economy, the government as well as the central bank often intervene and govern the interest rates so that the economy continues to be on the path of development and progress.

Recently, after the interest rate was capped by the government, it became the most talked-about issue for stakeholders of the banking sector as far as savings and investment are concerned. The overall banking sector of the country is passing through an interest-rate dilemma especially in respect to deposit. The sector is already struggling against increasing number of non-performing loans (NPLs), capital shortfall and financial scams. In addition to this, some banks are now facing liquidity crisis due to the implementation of advance-deposit ratio (ADR). This has resulted in a demand for deposit in the banking sector leading to rise in interest rates on deposit.

When the private sector credit growth is going down, the question remains: why is the deposit from private sector not growing as desired?

Many say that these deposits are en route to an attractive alternative like the National Savings Certificate which offers more lucrative interest rate.

Some small depositors still feel that banking is a trustworthy sector where they can deposit money. In fact, many depositors are directly and indirectly dependent on the interests they receive from bank deposits. There are very few credible options for deposits other than banks.

The senior citizens, highly dependent on income from interest, are extremely risk averse. They are currently finding little to no interest for investing their money in capital market and the NBFIs (Non-Banking Financial Institutions). Common people have little incentive to save their hard-earned money in the banks and watch it lose its value over time. It should be mentioned here that if the deposit rate is below the inflation rate, the depositors practically have no return against their deposits. Moreover the government imposition of various taxes has further reduced expected return on deposits.

Under the circumstances, the National Savings Certificate (NSC) has turned into an established source of investment that most investors and depositors are looking into as---it offers more profit and it is a government-owned scheme with monthly/quarterly withdrawal facilities. Unfortunately everyone does not have the access to buy NSCs because many public and private commercial banks are reluctant to sell them. Moreover, intended investors have individual limit because of regulatory bindings. On the other hand, as per recent Fiscal Policy (2019-2020), tax was imposed on interest at 10 per cent instead of 5.0 per cent, which will be deducted at source. This will discourage a good number of potential investors.

Still, due to the much lower rate of return offered by the banks, a mad rush of investor/depositors to the National Savings Certificate can be observed. If national savings are persistently channelled from the government to the public investors/depositors, then not only the banks will be deprived of deposits, but also the role of banks as financial intermediaries will be adversely affected.

High dependency on NSC also creates a debt burden on the economy, as the government has to borrow at a high interest rate. On the other hand, depositors who have access to diverse sectors to invest or deposit-they run to the renowned NBFIs for getting better rate of return while others are interested to invest the sum into the volatile capital market. It should be mentioned here that investors or depositors are now more sceptical while depositing their money with NBFIs.

But it is indeed a fact that senior citizens are one of the groups of people who will suffer if the banks rate of interest on deposit diminishes. This will open up the scope for many unregulated organisations to take advantage of this vacuum and attract these depositors with unrealistic and unauthentic deposit schemes. This may lead to most of the senior citizen depositors losing their life's savings or a substantial amount from them.

The government has no policies for a parallel rate on saving instruments for this group. The government can consider steps taken in the West like social security benefits. It should be noted that interest income in many countries of the West are now low. Still retired citizens maintain a certain standard of living through the help of different types of social service benefits.

 Banks are likely to reap rewards from low interest rates as it would reduce the likelihood of NPLs in the banking sector. Relatively higher rate on deposits will encourage people to keep their surplus money in banks. Even if the deposit rates are low, people would still prefer to keep their money with dependable and trustworthy banks for a consistent and reliable income rather than to invest in dubious financial institutions that are promising higher interest rates. Depositors', especially senior citizens, also seek reliability and consistency in their income from financial sectors.

When we look into the trend of important macro variables such as inflation in the economy, depreciation of taka and sorry state of fund recovery from loan defaulters, it indicates a tendency of both higher deposits and lending rate. Then why should a depositor, especially the senior citizens, deposit money in a bank providing nominal interest rate when the average inflation rate is more than this? This is why the government, banks, NBFIs and other stakeholders should come forward with sound deposit schemes especially for the senior citizens so that their deposits are safe and they get good returns.

 In contrast, it is quite necessary to maintain a smart database of the savings instruments to validate which segments of the society are investing the maximum amount of money in the tools. Otherwise, a situation may soon arise where the wealthy citizens are parking their money heavily in NSCs and forcing the government to borrow more from the instruments than its budgetary target.     

Tapash Chandra Paul, PhD is the Head of Risk Management Division, Mercantile Bank Ltd.

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