The New Nation - Internet Edition

AS Bangladesh Bank data recently revealed, depositors are losing the value of their money as inflation widely overruns the real deposit rates offered by banks. The weighted average deposit rate at the end of March stood at 6.9 per cent, while the average inflation was 10 per cent, meaning that a depositor, who put Taka 100 in a bank account in June last year, would now get Tk 96.9 in real terms. The real deposit rate was negative 0.35 per cent at the end of fiscal year 2006-2007 and negative 0.48 per cent at the year-end. The banks, on the other hand, are helpless in protecting the depositors from losing real value of money as they walk a tightrope between raising deposit rates and making loans costlier for the private sector.

In such cases small savers would opt for withdrawing their deposits and exhaust those to meet the soaring cost of living, which would affect the national savings and further worsen the banks' liquidity problems. This is a rather 'difficult situation' for the banking sector and the economy as a whole. According to some experts, there is only one way left and the government has to take steps to raise people's real incomes and widen social safety-net coverage to help people cut on costs of food, education and healthcare.

Following continuous pressure from the government and the central bank, the commercial banks earlier agreed to lower their spread - gap between deposit and lending rates - to 5 per cent, keeping deposit rates unchanged. It is assumed that lower lending rates would stimulate investment and economic growth if other determinants including macroeconomic policies, socio-political regime and legal and institutional framework remain favourable as stated in a policy paper prepared by the country's central bank.