Key Highlights:
- Bangladesh’s banking sector have experienced a significant surge, reaching a staggering Tk 7.8 trillion as of the fourth quarter of 2023
- In the October-December 2023 period, the proportion of fixed deposits in the banking system rose slightly from 44.25% to 44.42%
- Presently, numerous banks are extending interest rates of over 10% on term deposits, with a select few experiencing liquidity shortages offering rates as high as approximately 12% for one-year tenure deposits
In a remarkable turn of events, term deposits in Bangladesh’s banking sector have experienced a significant surge, reaching a staggering Tk 7.8 trillion as of the fourth quarter of 2023. This resurgence comes as uncapping interest rates pays off, attracting back depositors who had previously sought alternative investment avenues.
Official statistics reveal that term deposits in banks have rebounded, witnessing a substantial increase of Tk 189.3 billion during the last quarter of 2023. This surge is particularly noteworthy, considering the liquidity challenges faced by financial institutions. The share of fixed deposits in the total bank deposits has been gradually expanding, driven by rising interest rates on these deposits, coupled with competitive lending rates.
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In the October-December 2023 period, the proportion of fixed deposits in the banking system rose slightly from 44.25% to 44.42%, marking a 2.5% increase. Bangladesh’s banking system held total deposits amounting to Tk 17.5 trillion by the end of December 2023.
Conversely, the percentage of savings deposits compared to total deposits decreased from 21.8% on September 30, 2023, to 21.4% by December 31. This decline was attributed to the limited interest gains available to savers. The total value of savings deposits stands at Tk 3.7 trillion, as per recent Bangladesh Bank statistics.
Furthermore, the share of special-notice deposits, which offer minimal interest, experienced a 3.5% decrease, falling to Tk 1.6 trillion.
According to sources familiar with banking sector trends, the surge in fixed deposits is linked to the rising interest rates. They attribute this trend to the implementation of SMART, an interest rate benchmark for lending introduced in July 2023, which has led to higher interest rates on deposits.
Bangladesh Bank’s Move to Lift Interest Caps, Tackle Inflation
The central bank had previously stated that deposit interest rates should never fall below the 3-month average inflation rate. With inflation currently at around 9% and the average deposit interest rate at only 4%, a simple calculation revealed that depositors were facing a negative interest rate of approximately 5%. This means that for every Tk 100 deposited, the depositor is effectively receiving only Tk 95.
Bangladesh Bank (BB) had planned to gradually remove restrictions on credit interest rates, but there are already ‘unofficial’ indications that banks are being given more freedom. According to officials, the central bank intends to start by removing the interest rate cap on SMEs, followed by working capital and industrial term loans simultaneously. This shift towards an open money market is aimed at enabling banks to adjust interest rates to counteract the significant pressure of inflation.
As part of the effort to reintroduce market-driven lending rates, the central bank has informally permitted banks to increase interest rates on consumer goods. Bankers welcome this decision, arguing that gradually phasing out interest rate ceilings will not only promote the sustainability of banks but also encourage investment in appropriate sectors while enhancing market efficiency.
Term Deposit Interest Rates on the Rise
Presently, numerous banks are extending interest rates of over 10% on term deposits, with a select few experiencing liquidity shortages offering rates as high as approximately 12% for one-year tenure deposits. Banks facing liquidity crises are enticing depositors with relatively elevated interest rates, some reaching up to 13.40%.
Padma Bank Ltd is presently receiving term deposits at rates of up to 10%. Meanwhile, National Bank is enticing depositors with interest rates up to 13.40%, which could potentially double the principal amount in five and a half years through their Special Savings Scheme. Additionally, the Shariah-based Social Islami Bank is offering a 9.5% profit on deposits held for three years.
According to the central bank’s report, bank deposits stood at Tk15,64,079 crore in May 2023, escalating to Tk15,95,254 crore in June. Subsequently, in July, deposits rose to Tk16,07,895 crore, further increasing to Tk16,18,50,816 crore in August. By September, deposits had surged to Tk16,23,74,016 crore, with a subsequent increase to Tk16,36,000 crore in October.
Deposit Growth:
- May 2023: Tk15,64,079 crore
- June 2023: Tk15,95,254 crore
- July 2023: Tk16,07,895 crore
- August 2023: Tk16,18,50,816 crore
- September 2023: Tk16,23,74,016 crore
- October 2023: Tk16,36,000 crore
Bangladesh Bank Cuts Interest Rates: What It Means for Consumers?
The Bangladesh Bank (BB) issued a circular, immediately reducing interest margins to 2.50% for deposits and 5.50% for loans, alongside the SMART rate. Previously, the maximum margins stood at SMART-plus 2.75% for deposits and 5.75% for lending.
This directive results in maximum interest rates on deposits and loans for Non-Bank Financial Institutions (NBFIs) now capped at 12.11% and 15.11% respectively. Prior to this circular, the maximum rates were 11.38% for deposits and 14.11% for loans in NBFIs.
Analysts and economists anticipate that the increased cost of funds could elevate production costs, thereby impacting the consumer market which is already experiencing overheating. This adjustment in rates reflects a global trend, where central banks are utilizing such measures to combat inflation.
Interest Margin Reduction:
- Deposits: Reduced to 2.50%
- Loans: Reduced to 5.50%
- Previously: Maximum margins were SMART-plus 2.75% for deposits and 5.75% for lending.
Impact on NBFIs:
- Maximum interest rates on deposits: Now capped at 12.11%
- Maximum interest rates on loans: Now capped at 15.11%
As Bangladesh’s banking sector experiences a dynamic shift with term deposits soaring to unprecedented levels, it signals a resounding victory for uncapped interest rates.With fixed deposits taking center stage and interest rates on the rise, Bangladesh’s financial arena stands on the brink of profound change. As the nation embraces this path towards a market-driven economy, fueled by competitive lending rates and renewed investor confidence, the future shines bright with promise and opportunity.
