In our country interest rate on deposit is relatively very high and one of the reasons for high deposit rate is the government's deficit budget. Every year the government undertakes budget with substantial deficit financing and part of this huge deposit is mobilized from the sale of Government Savings Certificate. Therefore it has to maintain high rate of interest on savings certificate so as to make it an attractive instrument to the savers. In order to compete with the rate of Savings Certificate, commercial banks have to keep their rate on deposit at par and even sometimes marginally higher than that of the Savings Certificate.
Apart from theoretical factors, this reality of our economy is considered as the main reason behind high rate of interest on deposit. As long as government budget is not balanced, i.e., deficit budget continues, the rate on Savings Certificate will not decline and as a result, deposit rate will also remain high in our money market. Without taking this reality into consideration, any attempt to keep interest rate low will tantamount to forceful reduction of interest rate which will backfire and may create a severe turmoil in the country's money market. During the period of 2004 and 2005, initiative was taken to forcibly bring down both deposit rate and lending rate to single digit and its adverse outcome is known to everybody. The action had completely backfired creating a turmoil in country's money market which skyrocketed call money rate to record high of 60 per cent-70 per cent. Therefore, without considering the real economic situation, particularly government's deficit financing, the recent move on maintaining low interest rate may have very adverse impact in the economy although not in the short run but in the long run.
DIFFERENTIAL RATE ON SANCHAYPATRAS AND BANK DEPOSIT MAY LEAD TO MALPRACTICE: In general, interest rate on government savings scheme, viz., Sanchayapatras, is higher than that on the bank deposits in our country but there always remains a close proximity between these two different types of savings instruments. But with recent substantial interest rate cut on bank deposits, there have been wide gap between interest rates on the government savings instrument and bank savings. So the savers will try to move towards the government savings instruments, preferably, Sanchayapatras. However, Sanchayapatras are not straight forward vanilla-type savings opportunity. There are various forms of Sanchayapatras, viz., Family Sanchayapatras which are restricted to certain sections of people. Moreover, there is maximum cap on purchasing Sanchayapatras by one person. So, all people will not be able to save money in the form of Sanchayapatra as much as they desire due to some barriers on it. At the same time, Sanchayapatras will remain high-yielding savings opportunity in the market, so people will become desperate to purchase these instruments. They may then resort to purchasing Sanchayapatras in different names. Even it is not unlikely that some unscrupulous people may purchase Sanchayapatras in fake names as necessity knows no law. All of these attempts may result in financial anomalies in the money market.
ALTERNATIVE DEPOSIT SCHEME: In order to maintain people's high propensity to save and with a view to allowing marginal segment's income unaffected, an alternative arrangement can be made by categorizing the entire deposit mobilization drive into two groups of which one is family-based deposit cap while the other is competitive deposit collection. Under family-based deposit cap, maximum amount, viz., Tk 50 million (5.0 crore) or Tk 40 million (4.0 crore) deposit per family depending upon the prevailing socio-economic condition can be fixed and preferential interest rate having consistency with the government savings certificate may be offered to the depositors whose total family deposit will not exceed this cap. The deposits exceeding this threshold level will be mobilized through competitive means where interest rate will be offered depending on the market competition, risk factor of the institute and the term of the deposit. Based on Asset Liability Management (ALM) analysis, higher rate may necessarily be offered to short-term deposit while lower rate is likely to be offered to the long-term deposit or vice versa. Since depositors above the threshold level belong to the affluent class, any change in interest rate on deposit will not severely impact the disposable income of those people and therefore aggregate demand may not be affected.
Now, it may appear that demarcation between two different deposit mobilization drives, specially, determining the maximum amount of deposit per family may be a very difficult task. Consequently depositors may evade this cap by retaining their savings in different banks. No action is difficult if properly understood and appropriate measures are taken. We have to keep in mind that there is no foolproof system in the world as every system has some limitation which is always exploited by some people but this does not cause any major impact on the overall performance. If this maximum cap is determined exclusively for each bank, it will not be difficult at all because the bank's own database will reveal total deposit each family has with that bank. However, if the cap is applicable for the whole country, this cap will be determined by aggregating deposits retained with all banks which may be difficult to ascertain unless the depositors provide honest declaration because there is no centralized database on the country's deposits.
Nevertheless, such a countrywide maximum cap may be introduced solely based on the honest declaration about the maximum deposit for the entire family being maintained with all the banks for their family members. In the declaration, if any untrue statement or false information is provided, the depositors will lose their entitlement of preferential interest rate. Of course, there is a possibility that some unscrupulous people may provide false statement and abuse this system but majority depositors are law-abiding people from whom bank will be able to mobilize sustainable deposit. Similarly, the income source of small and marginal family will not be affected. In this way competitive environment may be created in the country's money market which may eventually lead to the development of efficient money market. However banks will have to think about creating centralized database on depositors in the long run which should not be a difficult task at all. All banks have introduced on-line and computerized banking system where all information, including deposits, is electronically recorded. Using this electronically recorded data, a centralized online database on depositors may easily be created under direct supervision and authority of the Bangladesh Bank.
Savings, which come in the form of deposit, is the most important economic parameter. Deposits not only provide the supply of investible fund but also ensure the strong capital base of the financial institutions and the country as a whole. Statistics on our country's savings to GDP ratio is not available but it is strongly believed and recommended that savings-GDP ratio of around 30 per cent to 40 per cent is necessary for the country's sustainable growth and development. So deposit mobilization drive must be maintained at current level and should be accelerated to some extent. Since interest rate works as an encouraging factor in mobilizing deposit, it should not be reduced forcibly but should be allowed to follow the usual course of money market, the force of which will determine the appropriate rate.
The writer is a Toronto-based banker.
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