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Saturday, January 13, 2018

Avoid savings tools as prime borrowing source

SAVERS' appetite for high-yielding schemes shows no sign of fading as net sales of savings certificates rose 4.19 percent year-on-year basis in the first five months of the fiscal year. A national daily reported that in the July-November period, the government's borrowing through the savings instruments was more than 70 percent of the entire fiscal year's target of Tk 30,150 crore.
The attraction of the savings tools is their interest rates -- 11.04 to 11.76 percent -- ways higher than the 7 to 8 percent offered by banks on fixed deposits. The increased  selling of the savings tools is a safe choice for the retired and women as the banking system under this government drastically lost people's trust but at the end it emits a bad signal for the economy in general due to rising government expenditure. Rebuilding trust in banks and ensuring investment friendly environment can divert people to opt for other mode of investment.
In fiscal 2016-17, net sales of savings tools hit an all-time high of Tk 52,327 crore, more than 2.5 times higher than the government's target of Tk 19,610 crore. Insiders of Bangladesh Bank said that the trend will continue this year also if the government does not slash the rates. This form of borrowing is pushing up the government's expenditure. Because of the large sales, the government's net borrowing from the banking sector went into the negative in the first quarter of 2017-18. The government borrowed Tk 2,132.3 crore and repaid Tk 5,270.2 crore, taking its net borrowing to Tk 3,137.90 crore in the negative.
Commercial banks have recently increased the rate of interest on their deposit products because of a shortage of liquid funds. Some banks have also adopted an "aggressive lending" policy causing much concern to the central bank as such trends left an adverse impact on their liquidity base. In November, private sector credit growth stood at 19.06 percent, far beyond the target of 16.2 percent set by the central bank for the first half of the fiscal year. Against this backdrop, the banks will increase the rate on their deposit products in the months to come to alleviate the liquidity crunch. The sales of savings tools may decrease when the rate on banks' products will go up. On the other hand, we can say investment in the savings instruments would increase further in the coming days as depositors' confidence in the banking sector has eroded because of frequent financial scams.
The higher rates on the savings tools are encouraging investors to park their money in the instruments which will create a mismatch for the government in dealing with deficit financing. The government should not slash the interest rates on the savings certificates because the tools are mainly bought by middle and lower-middle income groups. But the government should stop the sales of savings tools when its budgetary target is met.