Savings tools interests cut to divert investment to industries

The government on Tuesday cut interest rates on all types of savings tools – after around six years – with an aim to divert large investments to industries and the capital market.

Under the new rates, for savings instruments amounting to over Tk15 lakh with a five-year tenure, investors will get as much as 10.75% in profit – down by 1 percentage point, according to a circular issued by the Internal Resource Division of the finance ministry on Tuesday.

An investment over Tk30 lakh will yield the highest, 9.75% – 2 percentage points lower than the existing rate.

In 2015, the highest interest rate on savings certificates was slashed by 2 percentage points to 11.76% from 13%.

The new interest rates have been cut to minimise the government's interest liability and discourage people from buying savings certificates, said Suraiya Pervin Shelley, joint secretary (Savings) at the Internal Resources Division.

An objective of savings certificates is to help elderly people, women, and the physically challenged and differently-abled with interest returns against their small savings. But a large number of well-off people are buying such certificates, depriving the target people of the benefits.

Against this backdrop, the government has come up with the move, aiming at diverting investments to industries and the capital market, Suriaya said.

The interest rate for three-year savings certificates has been reduced to 10% for investments of more than Tk15 lakh, while those who will invest more than Tk30 lakh will get a 9% interest at the end of the tenure.

Retirees who will invest more than Tk15 lakh in the five-year term pensioner savings certificate will get a 10.75% profit at the end of the term and if the investment is more than Tk30 lakh, this rate will be 9.75%, according to the new rates.

The interest rate on the investment of more than Tk15 lakh in five-year family savings certificates has been slashed to 10.50%, while the rate is 9.50% for investments amounting to above Tk30 lakh.

The revised rate will be effective only for those who will buy new savings certificates from now on. After the expiry of the previously bought savings certificate, the new rate will be effective if the same amount is reinvested, the circular said.

This new rate of interest will apply to both individuals and organisations.

Currently, the rate of interest on three-year savings certificates is 11.04%, 11.28% on five-year savings certificates, 11.76% on five-year pensioner savings certificates and 11.52% on five-year family savings certificates at the end of term.

The current rate of interest on post office savings has been kept unchanged at 7.5%.

In April last year, the government brought down the lending rate to a maximum of 9%, while the deposit rate was set at a maximum of 6%. Since then, there has been a demand for cutting interest rates on savings tools. Then, the tax at source on all national savings instruments increased to 10% in FY20.

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, thinks cutting interest rates on savings certificates to reduce the government's burden is logical.

Probably, the last time the interest rates on savings certificates were reduced was in 2015. Over the last few years, interest rates on all other instruments dropped at home and abroad and investment has been facilitated to a large extent, he said

The interest rate on savings certificates should be fixed in line with other investment structures at home and abroad, Zahid Hossain opined.

Savings certificate is an instrument for the social protection of disadvantaged people, but there is no participation of common people. Basically, government employees invest a huge amount of money in savings certificates after retirement. Many again increased the government's debt burden by buying savings certificates with idle money.

In FY21, the government borrowed about Tk42,000 crore in the form of savings certificates, which is more than double the target set in the original budget.

As of June last year, the government's net debt in savings certificates stood at around Tk3.44 lakh crore. People from different walks of life prefer savings tools for good interest returns.

For the current fiscal year, the government set a target to borrow Tk32,000 crore through sales of savings certificates in contrast to Tk20,000 crore.

Meanwhile, general savers criticised the rate cut on all types of savings certificates.

Anwar Parvez, a former joint secretary to the government, opined in favour of an investment of up to Tk70 lakh, keeping interest rates on pensioner and family savings certificates unchanged.

Otherwise, the money of retirees will go for risky investments such as in financial institutions and the stock market. Elderly people, women, and the physically challenged who almost exclusively depend on savings certificates will also be in trouble, he said.

Interest of migrants' saving bonds lowered too

Apart from the deposit certificate, the interest rate of the savings bonds for the Bangladeshi expatriates have also been lowered.     

The slashed interest rate will be applicable for the new investments in such bonds, not for the ones that had been purchased earlier.        

The bonds for the Bangladeshi migrants are the Wage Earners Development bond, US Dollar Premium bond and US Dollar Investment bond. 

These bonds are available at foreign exchange houses, any foreign branch of a local bank and at a Bangladesh branch. Local banks offer loans against the bonds. Besides, investors can take the money abroad if they so choose. 

The five-year Wage Earners Development bond offers profits up to 11.20%. If someone invests more than Tk15 lakh now, the interest will be 10.27% when the bond matures.

With an investment of more than Tk30 lakh, the profit rate will be 9.33%. And with an investment of more than Tk50 lakh, the profit will be at the rate of 8.40%.

The rate of profit for the US Dollar Premium bond with a three-year maturity has not been changed. At present, the interest rate on the bond is 7.5%.

Zahid Hussain said the interest rate for Wage Earner Development bonds had been much higher. There are doubts as to whether it is being used properly.

"With low-interest rates in the United States, many people may invest in US dollars and return it with a profit. Therefore, it is logical to reduce its interest rate," he added.