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Who cares for the depositors who provide life-blood to the banking sector? Single digit lending rate of 9.0 per cent is going to be in force from April 01, 2020 as per Bangladesh Bank circular (BRPD Circular No.03) published on 25-02-2020. Although Bangladesh Bank (BB) issued no instruction on deposit interest rate, a maximum interest of 6.0 per cent would be assigned to deposit products as desired and directed by the government. The majority of the depositors would fall victim to the decisions of the authorities. However, the government and Bangladesh Bank argue that single-digit lending rate would benefit the investors a lot and consequently private investment would go up remarkably. Regrettably, no attention was paid to the fate of millions of depositors.
What would be likely impacts of downward changes in interest rates upon the depositors and the borrowers and also upon the growth of deposits and advances in banking? The analysis is based on the answers to the following questions:
- i) What is our experience about interest rates, advances and deposits?
- ii) What is the structure of deposits and advances?
iii) Who may benefit how much and in what form?
It is obvious from Table 1 that 25 years' average rate of interest earned on deposits was 6.56 per cent and on advances was 12.30 per cent. As shown in the table, some trends on deposit and advances are worth considering. Up to the first 20 years (1994-95 to 2013-14), the weighted average interest on deposits kept on increasing and accordingly deposit grew at an increasing rate. However, deposit growth rate registered a decline in response to a slide in the interest rate. The relationship between interest and deposit growth was found to be clearly understandable. Trends also suggest that interest rate is the main determinant of deposit level.
On the other hand, it is observed that even at an interest of 12-13.5 per cent advances constantly grew. During the last 5 (five) years ending on June 30, 2019, advances grew but the rate of growth plummeted to 99 per cent from the previous rate of 146 per cent in spite of a substantial decline in the rate of interest (weighted). Too much emphasis upon lowering lending rate seems not to be consistent with the actual behaviour of interest changes and growth rates of advances. So interest rate is just one of the determinants of the change in the level of advances.
As on 30 June, 2019, scheduled banks hold deposits of Tk 11.40 trillion (1139832 crore), advances worth TK 9.51 trillion (51448 crore), and operate more than Tk 100 (10 crore) deposit accounts and more than 10 million (1.0 crore) loan accounts. A very insignificant number of the biggest depositors (i.e. 80396 account holders) or just 0.08 per cent of deposit account holders possess 44.30 per cent of deposit balance while 99.92 per cent of deposit account holders command 55.70 per cent of deposit balance ( Table 2). In terms of wealth strength, the average deposit balance of top 1.0 per cent group equals about 992 times that of the bottom 99 per cent group.
Table 3 shows that less than one hundred thousand biggest borrowers ( i.e. 96360 account holders) or just 0.90 per cent of account holders possess 72.49 per cent of total advances while 99.10 per cent of account holders hold only 27.51 per cent of total advances. The average balance of advances of top 1.0 per cent group equals about 400 times that of the bottom 99 per cent group. Analysis of deposits and advances during 2009 and 2014 indicates that deposit and advances concentration (sharing by the biggest depositors and borrowers) tended to rise gradually and may be estimated to continue in future too.
As a result of implementing single-digit interest rates, 99.92 per cent of the deposit account holders would forgo Tk 89.52 billion (8952 crore) as deposit interest and 99.10 per cent of the loan account holders would save Tk 86.39 billion (8639 crore), and ultimately they would together incur a net loss of Tk 3.13 billion (313 crore). On the other hand, only 0.08 per cent of the deposit account holders (within top 1.0 per cent) would forgo Tk.71.20 billion (7120 crore) as deposit interest and 0.90 per cent of the loan account holders (within top 1.0 per cent) would save Tk.227.59 billion (72759 crore) and thereby earn a net gain of 156.39 billion (Table 4). The biggest deposit accounts having an average deposit balance of more than Tk 60 million (6.0 crore) are only 80396 in number and the biggest advance accounts having an average advance balance of about Tk 100 million are only 96360 in number. Out of them, 88378 (Notes d to Table 4) may be regarded as real individuals or enterprises. Based on this number, per member, net gain stands at Tk. 1.77 million (17.70 lakh) per annum. This is likely to increase with increase in deposits and advances every year. The rest of other depositors (more than 99 per cent) and borrowers are destined to incur losses from year to year. On account of inflation rate, depositors' real return on deposits may even be negative (there is also extra burden of tax and excise duty) but the borrowers would continue to benefit from much lower lending rate. As a whole, income disparity between the top 1.0 per cent and the bottom 99 per cent would widen.
Unfortunately, almost all the depositors (except about one hundred thousand) would become helpless victims of both the ineffective market mechanism and the overtly pro-business stance of the government. Inevitably, any government decision, particularly on the vital segments of the economy, shakes the existing structure of income or wealth distribution. Such is the case of shifting to single digit interest rates. Every economic and financial decision ought to be taken considering the interest of the majority of the people in general and low and medium income groups in particular. Moreover, such type of decisions should be preceded by an impact study based on a holistic view.
Haradhan Sarker is ex-financial analyst, Sonali Bank and retired professor of management.