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Savings certificates: Let market forces determine yield rates

Asjadul Kibria | Published: August 09, 2019 20:47:32 | Updated: August 09, 2019 22:17:14


Lack of depth and diversity in the country's financial market is a big barrier to making it vibrant.  One way to enhance the depth of the market is to bring more fixed-income securities. Currently, a number of fixed income government securities are available. All of these are not tradable in the market. Again, there is virtually no fixed-income private securities or corporate bond.

Treasury bills and treasury bonds with different maturities are short-term and long-term fixed- income government securities available in the market. These are also partially tradable in the secondary market. Only designated primary dealer (PD) banks are allowed to trade in these securities. Other institutions and individuals can invest in these securities through PD banks.  Thus, the secondary market activities of treasury bills and treasury bonds are still limited.

Savings certificates, issued by the national savings directorate (NSD), are the main non-tradable fixed-income securities of the government.  Individuals and institutions can invest in these instruments directly. There are also other fixed-income non-tradable securities. These are: prize bond, savings bonds for Non-Resident Bangladeshis (NRBs) and special purpose treasury bond.

The government uses these securities to mobilise funds from the public through banks and financial institutions. Thus, these are basically public debt tools of the government.  Besides tax and non-tax revenue, the government borrows from the public to finance budget deficit. Borrowing through treasury bills and bonds is considered as borrowing from the banking system whereas borrowing through savings certificates or sanchayapatra is known as non-bank borrowing.

Over the years borrowing through savings certificates exceeded borrowing through treasury bills and bonds. Bangladesh Bank statistics show that the ratio of the outstanding amount of domestic public debt from the banking sector decreased gradually from FY13 to FY18 whereas outstanding debt liabilities from NSD certificates increased significantly. Massive selling of these securities increased the ratio to 60 per cent of the total outstanding of public debt in FY18 which was only 35 per cent in FY13.

The average annual yield rate of four types of savings certificates, currently available in the market, is around 10.50 per cent. The securities are: 5-years Bangladesh Sanchayap-atra, Pensioner Sanchayapatra, Poribar Sanchayapatra  and 3-Monthly Interest-bearing Sanchay-apatra. Maturity of the last one is three years and rest are five years. Due to higher yield rates, these are very popular among the people.

The average yield rate of treasury bonds is 7.50 per cent. There are five treasury bonds with different maturities (two, five, ten, fifteen and twenty years). Average yield rate of short-term fixed-income securities is around 3.50 per cent. Available in the market are also 91-day, 182-day and 354-day treasury bills.  

The yield rates of the savings certificates are determined by the government. Being non-tradable securities, no market mechanism works here.  Under pressure from the International Monetary Fund (IMF), the government has reduced the rates at different times. IMF suggested to bring down the rates close to the rates of treasury bonds. But the yield rates are still higher. 

There was a time when yield rate of some of the savings certificates like defence savings certificate (now defunct) was as high as 16 per cent.  As part of the financial sector reform, the very high yield-bearing savings certificates were phased out gradually. The legacy of market-distorting high yield rates, however, continues.

A number of irregularities are also there.  Though termed a shield for lower- and middle-income people against inflation, higher threshold of investment allows many rich people to purchase the instruments. Many of them invest in others' names too as there is no way to verify the authenticity of the investors. There is no central data base of the investors.

A number of reform measures have finally started in recent times. Mandatory Tax Identification Number (TIN), tax deduction at source, mandatory bank account and electronic transfer of profits to the bond holder's account are some right steps to streamline the management of the savings certificates. Online database -- the most important tool to check overinvestment - is still far away.

The government may now think of making the savings certificates tradable in the financial market.  It will enhance the depth of the financial market to some extent. Investors will be able to encash the instruments anytime. The yield rates will be determined by market forces. It will also help develop a full-fledged bond market in the country.  

The government has already decided to reduce dependency on savings certificates to finance the budget deficit. The medium-term macroeconomic policy statement for FY19-FY21 projected to reduce the target of sales of NSD certificates at 0.7 per cent of the country's Gross Domestic Product (GDP). "With no direct control over the NSC flows, in the medium term, government has taken various measures to rectify domestic imbalance [that] arises due to higher growth in NSC," said the statement.  Outstanding balance of these certificates already crossed 10 per cent of GDP in FY18, which was 8.0 per cent in FY176.

Reduction of sale of savings certificates will apparently reduce the interest payment burden of the government.  Floating the instruments in the market will make it competitive for investment. Currently, allegation is also there that in some cases bank officials are not willing to sell the certificates. Making these tradable will widen the opportunity to purchase them from the market.

At the initial stage, these certificates may be traded like treasury bonds at a limited scale. Based on the initial experience, next course of action may be set to make them freely tradable in the secondary market. In this connection, removal of existing barriers to freely trade the treasury bonds is a must.

Making the savings certificates tradable in the financial market is a challenging work. It requires a series of preparations. A legal framework is also needed in this regard.  

asjadulk@gmail.com

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