Middle class savings under pressure

In the banking sector, money is now cheaper than ever before.

Low interest rates are a blessing for borrowers but a curse for the middle class depositors who depend on interest earnings. Money in the bank is now a loss for them.

Most banks in the country are currently offering interest rates ranging from 3% to 4% against savings – far below the 5.63% inflation rate as of February this year.

Most banks have brought down their cost of funds to below 3% following the single digit lending rate set from 1 April last year, making these depositors losers.

If anyone keeps Tk25,001 in a bank at a 4% interest rate, the annual return will be Tk1,000.

But, the depositor will have to pay Tk400 (Tk200 twice a year) as account maintenance fee, 15% VAT on account maintenance fee amounting to Tk60, and a 15% tax (in case of not having a tax identification number) totalling Tk150. With the 5.63% inflation calculated, the cost would be Tk1,407 on a Tk25,001 deposit.

After deduction of the total costs of Tk2,017, the depositor will see a loss of Tk1,017 from the bank deposit – meaning the total deposit balance will reduce to Tk23,983 at the end of the year.

The dilemma of the middle class has also come to the central bank's attention. The regulator last week halved the account maintenance fee for this year, taking the pandemic into account.

Depositors who have a deposit of up to Tk10 lakh in their savings accounts in 2021 will get this facility. This facility will not be applicable for current accounts.

According to the decision, banks will deduct the account maintenance fee once instead of twice for this year.

The reduction of account maintenance fees will give savers a little relief. This is because after the reduction of the account maintenance fee, a saver will now incur a loss of Tk817 against a Tk25,001 deposit at the end of the year.

This loss in depositing money with banks is discouraging savings, causing a fall in growth of term deposits.

The term deposit growth stood at 11.66% in January this year, down from 13.48% in the corresponding period a year ago.

However, overall deposit growth has continued to show an upward trend even amid the pandemic, reaching 13% in January this year from 12.76% in the same period of the previous year, according to Bangladesh Bank data.

The impact of negative returns on bank deposits does not appear to be severe because savers have barely any other alternative option for parking their surplus cash, observed Abu Farah Md Naser, deputy governor of the Bangladesh Bank.

Government saving instruments are an alternative for small savers to invest money but a mandatory TIN (Tax Identification Number) has limited the option, he continued.

"Small depositors usually do not have a TIN and have to keep money in banks even at a loss in real terms.

"Against this backdrop, the central bank has reduced the account maintenance fee. This will give small depositors a little relief," he maintained.

However, Naser thinks the central bank alone cannot protect the middle class savers. The government should come forward and relax conditions for investing in savings instruments, he said.

In the fiscal 2019-20, the government tightened the terms for investing in savings schemes by setting some conditions, such as TINs and no cash transactions.

Bank deposits are the only option for small depositors to secure their money, but they are being affected due to not having interest rate flexibility, said Zahid Hussain, former lead economist at the World Bank's Dhaka office.

He said there is no scope for competition in lending rates as the government has required a single digit interest rate from banks. Consequently, there is no competition for deposits among banks, which has ultimately led to losses for the middle class.

Moreover, the Bangladesh Bank appears to be over regulating banks, and bankers are always busy with complying. They are thus unable to focus on innovation of new deposit products to protect depositors, he added.

Lots of liquidity with limited scope for lending and investing, given the current market and regulatory environment, and the pumping of money through stimulus packages, has driven banks to cut interest rates on deposits, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

Banks are now reluctant to take fresh deposits, while some banks are releasing term deposits after maturity instead of renewing them in order to reduce the cost of funds, he said.

A few banks have lost a huge chunk of deposits over the last one year due to low interest rates on deposits, he said, adding that overall deposit growth is still high due to healthy remittance inflows.

The middle class have few alternate investment options, he concluded.

The weighted average deposit rate of Dutch-Bangla Bank was 1.73% as of February, lowest among private commercial banks.

Some other large private commercial banks have brought down their weighted average deposit rate to less than 3%.

For example, Brac Bank's weighted average deposit rate is 2.74%, while those of Prime Bank and City Bank are 2.74% and 2.98% respectively, according to Bangladesh Bank data.

The number of total deposit accounts currently stands at around 11.58 crore. Of these, 90% are held by middle class families who have a deposit of Tk10 lakh or less, according to the central bank.

Earlier in October 2019, the Bangladesh Bank exempted account holders with deposits of Tk10,000 or less from a service charge given the low interest rates on deposits.

A central bank circular rationalised account maintenance fees for different ceilings of deposits in a bid to reduce savings costs for these depositors.

Account holders have to pay Tk100 against their savings, ranging from Tk10,000 to Tk25,000. 

Against savings ranging from Tk25,000 to Tk2 lakh,  customers have to pay Tk200 as service charge instead of Tk500.

Against an investment of Tk2 lakh to Tk10 lakh, savers have to pay Tk250 as service charge. If the amount is more than Tk10 lakh, the service charge is set at Tk300.