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Banks awash with savings deposit during the Covid-19 pandemic

With a large number of restaurants, boutiques, and salons closed due to the COVID-19 pandemic, many Bangladeshis lucky enough to still have an income of any kind are discovering they’re actually saving money.

“I’m spending way less,” said Golam Morshed, 32, who works in a bank in Dhaka. “With the exception of groceries, all of my other expenses have gone down and my discretionary expenses are almost at zero.”

Hemaytul Islam, 38, a travel agency executive said he was initially amazed to see a higher balance in her bank account.

“Then I thought about it and realized I’m just buying groceries, not going out for dinner or shopping. It’s so interesting to realize how much money you spend that you really don’t need to.”

Many Bangladeshis have an opportunity to get a new perspective on their finances during the COVID-19 crisis, but the question is whether reduced spending will be a temporary blip caused by the lockdown, or whether consumers will start thinking twice about some of their purchases once the country’s businesses run in the full throttle.

Grocery bills are definitely higher for most people, as everyone is eating at home during the lockdown. But that represents a net savings for those who are doing their own cooking and not ordering in frequently. Homemade meals cost far less than restaurant food.

This propensity of individual and households to save has reached unprecedented levels in response to COVID-19. Banks are also seeing record rise in savings not only in Bangladesh but also globally.

The country’s banking sector in September this year saw a record high rate of savings in recent history.

Demand deposits with banks grew by a startling 21% year-on-year in September, up from 8.66% in the same month of last year.

The growth of demand deposits – money deposited into bank accounts with funds that depositors may withdraw on-demand at any time – shows that disposable income is piling up in bank accounts.

The significant rise in demand deposits boosted the overall deposit growth to 13% year-on-year in September, which is also highest in recent years.

The chequered balance sheets

However, the surge in savings is not equally balanced across society. The growth of term deposits has slowed down, reflecting that low-income people are spending their savings amid job cuts and income losses.

While many white-collar workers have saved money by working from home and cutting trips to shopping malls or restaurants, thousands of others, especially younger workers and women, have lost their jobs in the hospitality and retail sectors.

Therefore, the trends of different types of deposits show that the rich are getting richer while the poor are getting poorer during the pandemic.

Term deposits, accounts in which depositors save money for a predetermined period ranging from a few months to several years, grew by 12.19% year-on-year in September this year, down from 12.25% in the same month of last year, according to Bangladesh Bank data.

The total deposits increased by around Tk1 lakh crore in six months from March to September this year following the outbreak of the novel coronavirus. During the corresponding period of last year, the volume of increase was Tk70,000 crore.

The banking sector saw an excess deposit of Tk30,000 crore during the pandemic, according to the central bank’s data.

Total deposits in the country’s banking sector stood at Tk13.45 lakh crore in September last.

Meanwhile, the surge in demand deposits contributed to a reduction of fund costs for banks as clients get almost zero interest on such deposits. On the other hand, banks have to pay higher interests on term deposits.

The increasing trend of low-cost money left banks awash with excess liquidity, taking the total volume of surplus money in the banking system to a record Tk1.83 lakh crore in October.

What the industry experts say?

Even though savings are on the rise amid limited scopes for spending, there will be a huge pent-up demand soon after a coronavirus vaccine hits the market, said industry experts, adding, this will lead to a big spending spree that will help the economy bounce back more quickly than anticipated by forecasters.

“The excess savings are a result of consumers’ being shy in spending amid restrictions on movement during this crisis period,” pointed out Md Arfan Ali, managing director of Bank Asia.

Moreover, investors are shying away from fresh business expansion amid the pandemic, causing excess liquidity to pile up in banks, he continued.

He, however, hoped that there will be huge demands for loans and consumers will go on a spending spree soon after a Covid-19 vaccine comes. Therefore, he suggested banks to be ready to support consumers and investors when loan demands rise.

The Bank Asia MD also observed that low-cost deposits have helped banks reduce their fund costs, which will enable them to lend at lower rates in the coming days.

The average deposit rate stood at 4.73% in October this year, and most banks are taking deposits at 1-2% interests, according to banks.

The rising deposits reflect the conservative spending behaviour of the people, said Md Habibur Rahman, executive director (research) of the Bangladesh Bank.

As a universal reaction, people save more during a crisis period, he observed, adding that banks now will have to be proactive to channelise money into investment.

Private sector credit growth dips lowest in September

A robust growth in remittance inflow in contrast to a low private sector credit growth also contributed to the surge in deposits, experts said.

Bangladeshi expatriates are sending home more money during the pandemic but the corresponding spending did not grow, which is also contributing to the piling up of excess liquidity.

In November, expatriates sent home $2 billion – 33% higher compared to that of the same month of last year.

Despite huge liquidity in the banking system, private sector credit growth tumbled to 8.61% in October, which is the lowest in recent times.

Global trend of savings

Excess savings of about £100 billion built up by UK households during Covid-19 lockdowns are now being spent and could speed up Britain’s economic recovery, according to the Bank of England’s chief economist.

The UK savings ratio, which measures how much disposable incomes are set aside, rose to 29% between April and June this year, compared to 6.8% in the same period last year. The ratio is more than twice as high as the previous record of 14.4%, set almost three decades ago.

Meanwhile, the US personal saving rate – the percentage of people’s income remaining each month after taxes and spending – skyrocketed to a record 32.2% in April, up from 12.7% in March, according to the US Bureau of Economic Analysis.

At the same time, consumer spending fell 12.6% as the economy slowed down and unemployment rose.

Data from the Federal Reserve Bank of St Louis show the previous record American saving rate was 17.3% in May 1975, at the tail end of a recession spurred by rocketing gas prices, government spending on the Vietnam War, and a Wall Street stock crash. Over the last 10 years, it has hovered in the 6-8% range.

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