Treasury bonds rise as safe haven over dipping bank deposits

Nahida Khanam, a lawyer, has been able to accumulate a significant sum of capital through prudent financial management. Initially, she considered investing in savings certificates, but following advice from an acquaintance, she learned that investing in Treasury bonds is now a more profitable option.

She has a savings account with Dutch-Bangla Bank and visited the bank's Eskaton branch to discuss purchasing Treasury bonds.

The trend of depositors in the banking sector investing in Treasury bonds is relatively recent. Until recently, only institutional investors would invest in these bonds. However, due to the profitability of investing in Treasury bonds, institutions are now increasing their investments.

As the economy starts to recover, even with a boost in remittances, the general public is under pressure due to inflation. In such a situation, while the growth in bank deposits is declining, the tendency to invest in Treasury bonds is increasing.

In 2023, MetLife Bangladesh kept Tk 150 billion, or 84 percent of its Tk 187 billion investment, in government Treasury bills and bonds.

A senior official of the company said this amount was around Tk 140 billion the previous year.

In 2023, Standard Chartered Bangladesh's profit increase of 41 percent was also contributed to by investments in bonds.

Several companies' financial reports indicate that investing in Treasury bills and bonds has resulted in record profits.

The interest rate on government Treasury bills is 12 percent, and on bonds, it is 12.80 percent, which is higher than any deposit interest rate.

This massive investment in this sector will significantly increase the government's interest payment burden. This pressure has caused the government to reduce the interest rates on savings certificates in several stages.

Ahsan H Mansur, Executive Director of the Policy Research Institute, told http://bdnews24.com: “The government is borrowing from banks because it needs money. Higher bank borrowing has led to higher interest rates on Treasury bills and bonds, which will further increase government expenditure.”

Bank deposits have predominantly been institutional. Government and private institutions and agencies have inflated these deposits. In addition, there are many large individual investors.

However, over the past six months, there has been a continuous decrease in deposit growth. This trend persists even as the economy starts to recover and remittance flow increases.

Mansur told http://bdnews24.com that given the size of the economy, the growth in deposits should have been at least 17 to 18 percent

However, the actual growth is much lower.

Currently, many banks offer higher interest rates or profits on deposits than savings certificates, yet the growth in bank deposits continues to decline.

In December last year, the growth rate in bank deposits was 11.04 percent. The following month, it dropped to 10.57 percent and further declined to 10.43 percent in February.

In March, it fell to 9.99 percent and in April, it decreased further to 8.63 percent. Although it slightly increased to 8.77 percent in May, it was still 0.04 percentage points lower than the same time the previous year.

Data from the Bangladesh Bank shows that in May of this year, deposits in the banking sector amounted to Tk 1.76 trillion, up from Tk 1.68 trillion the previous year, an increase of Tk 186.69 billion.

WHAT BANKERS SAY

When asked about the decline in deposit growth, Mohammad Masum, managing director of Citizens Bank, told http://bdnews24.com: “High inflation has had an impact. At the end of the month, additional savings would typically be deposited in the bank. However, the middle class is unable to save by the month-end. Despite promises of high interest, the desired deposits are not being achieved.”

Bangladesh has experienced high inflation for two years, with inflation rates consistently above 9 percent. In June, the rate reached 9.72 percent.

In a move to allow greater flexibility in the interest rate setting process, the central bank has left it to the banks to set interest rates for loans and deposits based on market forces.

Good banks are offering interest rates of 8 to 10 percent on deposits, and these banks have a relatively good liquidity situation.

Despite offering interest rates of 12 percent, several banks under pressure are experiencing difficulty in attracting deposits. This is evidenced by their inability to compete for funds despite offering higher interest rates.

Emranul Haque, managing director of Dhaka Bank, believes the shift towards Treasury bonds has played a greater role than inflation in reducing bank deposits.

Speaking to bdnews24.com, he said: “Over the past two years, as the interest on government Treasury bills and bonds has risen, individuals and institutions have significantly increased their investments in this sector. Many institutions are now favouring government Treasury bills and bonds over banks as a source of investment. This trend could continue to grow in the future.”

In June 2020, investments in Treasury bonds ranging from 2 to 20 years were Tk 2.16 trillion. By June 2024, the investment in this sector is projected to reach Tk 4.07 trillion.

The 365-day or shorter-term Treasury bills had an investment of Tk 662 billion in June 2020. By the end of June 2024, the investment in this sector is expected to reach Tk 1.41 trillion.

Mansur of PRI believes that alongside these two major reasons, a lack of confidence in the banking sector has also contributed to the decline in deposit growth.

“The central bank has failed to establish trust throughout the banking sector,” he commented, “that has led to a decrease in deposit growth.”

Md Arfan Ali, former managing director of Bank Asia, is reluctant to make decisions based on short-term trends.

He commented, “This year, the central bank has delegated the responsibility of determining interest rates on loans and deposits to the banks. It will take another six months to assess the impact of this decision on the economy. We need to review how deposit growth fares in September.”