Why more people are choosing savings tools

On 10 October 2023, a bustling Tuesday saw a higher-than-usual crowd at the National Savings Directorate office, housed in Don Tower at the Gulistan intersection in the capital.

Officials inside were diligently engaged in various tasks, ranging from information verification to providing guidance on bank accounts, interest rates, and terms.

Among the visitors was Sharmin Zaman, a resident of Bangsal in old Dhaka and a homemaker. She arrived at the office with the intention of investing Tk5 lakh in a savings certificate.

Her decision was influenced by a less-than-satisfactory experience with a bank deposit scheme, where the post-maturity returns fell short of her expectations.

Sharmin expressed her rationale, saying, “I plan to liquidate my previous investment and allocate the proceeds towards purchasing savings certificates. Family schemes seem to yield better returns, and the added security is reassuring.”

Sharmin’s interest in savings certificates is not unique, as a growing number of people are gravitating towards them.

In July and August this year, net sales of savings bonds surged to an impressive Tk5,562 crore, dwarfing the mere Tk401 crore recorded during the same period a year ago.

Officials concerned said the increasing trend in savings certificates sales continued in September as well, prompting questions about the sudden surge in savings bond sales.

Zahid Hussain, former lead economist of the World Bank’s Dhaka office, believes that rising inflation has inflicted economic hardship on many, but it has also created opportunities for some.

“High inflation has inadvertently channeled more money into the market, allowing some individuals to amass savings. This, in turn, has spurred an interest in investing these savings in bonds, altering the financial landscape,” he said.

AB Mirza Azizul Islam, an economist and former adviser to a caretaker government, highlighted the shift in people’s preferences away from traditional bank savings.

He said, “Low profits and heightened uncertainty have dissuaded people from keeping their funds in banks. Consequently, people are now more inclined towards savings cards. There is no alternative.”

Shamsul Alam, state minister for planning, emphasised the government's need for capital.

He pointed out that borrowing money from banks comes with its own set of challenges.

“Collecting funds through savings certificates appears to be a more attractive option, considering the financial landscape and economic conditions,” he said.

Rising interest in savings tools

People are buying savings certificates not only from the Gulistan office of the Savings Directorate but also from post offices and various banks across the country. Crowds of people have increased in those places as well.

Savings certificates can be purchased on the ground floor of the Bangladesh Bank’s head office in the capital’s Motijheel.

Khaled Hossain, who went there on Tuesday, expressed his intent to invest in a savings certificate, stating that it offers a secure option for saving money.

Another customer, Rashid Hasan, said keeping money in a bank is not profitable due to interest rates lagging behind inflation, making it more sensible to invest in savings certificates.

Sanjida Rahman, interested in a family savings certificate, cited concerns about the safety of keeping money in a bank amidst various rumours.

She also appreciated the automation of savings certificates, eliminating the need to visit the bank for profit collection, which she sees as a distinct advantage.

U-turn in sales

In July 2023, net sales of savings certificates witnessed a remarkable jump to Tk3,250 crore, compared to Tk393 crore in the corresponding month of the previous year. And in August this year, net sales amounted to Tk2,312 crore, up from previous year’s Tk8 crore.

The term “net sales” refers to what remains after paying the real interest on previously sold savings bonds. This money is deposited in the government’s treasury and is used for various state programmes. In return, savings certificate holders are paid monthly interest. Economically speaking, the net sale of savings bonds is considered a form of government “debt”.

In the last fiscal year, the government had set a target of borrowing Tk35,000 crore from savings bonds to bridge the budget deficit. However, due to factors such as austerity measures, reduced interest rates, and inflation, the government faced challenges in attracting savings, which resulted in reduced sales. Consequently, the revised budget lowered the target to Tk20,000 crore.

However, by the end of the financial year, the government did not get a single penny from in loan by selling savings certificates. Instead, it had to pay Tk3,296 crore from the exchequer or borrow from the banking system to cover the interest on previously sold savings bonds.

Last year, a total of Tk80,859 crore in savings bonds were sold, while a total of Tk84,155 crore was spent on interest and principal repayments.

This marked a historic incident for Bangladesh, as it was the first time that interest and principal repayments, as well as early redemption due to emergency needs, exceeded the total amount of new savings bonds sold.

This situation resulted in the government relying heavily on the banking system to address the budget deficit, with the government's loans from banks in fiscal 2022-23 surpassing Tk1 lakh crore.

Change in govt’s preference

Since this is an election year, the government is under pressure to meet various development expenditures.

However, with insufficient revenue, the option of printing money is not available. In this situation, the government considers borrowing from savings bonds, even though it entails higher interest rates compared to the banking system. This strategy is deemed preferable to printing money to prevent excessive inflation.

According to the Bangladesh Bank, the government's net debt from the banking sector reached Tk1,24,122 crore by the end of FY23. Of the amount, Tk98,826 crore was borrowed from the central bank, necessitating the printing of new money.

However, in the current fiscal year, the government is focused on repayment rather than taking new loans from the Bangladesh Bank, and commercial banks are cooperating by covering the loan amount.

In the budget for FY24, the government has set a target to borrow Tk1,32,395 crore from the banking system and an additional Tk18,000 crore from savings certificates.

Reasons behind the rise in interest

Economist AB Mirza Azizul Islam highlighted that bank deposits are losing value due to low interest rates that do not keep pace with inflation.

Many banks are facing liquidity and capital issues, raising doubts about their ability to repay depositors, he mentioned, adding that the capital market also is uncertain, prompting people to turn to savings bonds as a secure investment option.

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), explained that the impact of printing new money is usually five times greater. Last year, the Bangladesh Bank printed about Tk1 lakh crore, which is expected to increase the money supply by Tk5 lakh crore, significantly affecting the economy for the next one to two years, he said.

Zahid Hussain noted that savings certificates offer tax benefits, making them attractive for many investors.

“In times of inflation, many people are under stress. But a group of businessmen has benefited. As a result, their savings also have increased. They are investing that money in savings bonds. The government has also eased restrictions on the sale of savings bonds, leading to increased sales,” he concluded.