Money is very restive in nature. It flows in and flows out very frequently and hardly sticks to one particular place. It usually rushes to activities and areas that offer higher return.
This is what is now happening in the country's banking sector. Money is flowing out in large amounts from the banks to the government's savings tools that are offering relatively attractive annual yield rates.
Bank clients who have term-deposits are moving out of banks since the rates of interest on the same have declined by nearly 2.5 per cent over the last couple of years. The opposite has happened in the case of government savings tools. The yield rates of the savings tools have gone up, to some extent. The latter are now fetching the savers nearly 4.0 per cent higher return than that accrued from term deposits with banks.
Moreover, the ceiling of individual investment in savings tool has been increased and the profit accrued from investment up to Tk 500,000 in savings tools exempted from tax in the budget for the current fiscal.
So, the banks are now having a run on their term-deposits and the national savings directorate (NSD) is enjoying a heyday as far as the sale of savings certificates is concerned. Most part of the funds withdrawn from banks has flown into the NSD's instruments.
However, the banks do not feel disturbed by the decline in the volume of time-deposits for they are literally awash with idle funds because of the lower demand for funds from the private sector operators, on the one hand, and cautious lending on their part because of a number of loan scams, on the other.
The situation with the sale of savings tools was altogether different a couple of years back when not many people were found interested in putting their funds. This lack of interest had forced the government borrow from banks heavily. Last fiscal, the government had borrowed far less than the target it had set earlier.
Though it is hard to quantify, obviously, a substantial amount of money has been taken out by the investors from the stock market and re-invested it in savings tools that are considered safe and better-rewarding than bank deposits.
Stock market investors, who decided to remain in the market after the great crash of 2010, are increasingly finding it difficult to remain in the market. Despite all the government measures - market pundits consider most of the measures as cosmetic ones - to buoy up the market for the past three years, the market has not responded well. The indices have been behaving like the proverbial money scaling an oil-treated bamboo. It seems that the lacklustre performance of the market for months after months is now telling on the nerves of the investors. Many of them have started to tell themselves 'enough is enough. It is time to say goodbye'.
The closure of BO (beneficiary owner's) accounts for the past few months has gathered pace. According to a newspaper report, more than 0.1 million BO accounts were closed in the month of July alone.
Some erratic and unnatural behaviour such as sudden and short-lived surges in stock prices for no valid reasons noticed last year. But that phenomenon is not anymore visible after the demutualization of the country's bourses. This is, of course, a good omen for the market in the long-term. The dubious role played by a section of members of the erstwhile boards of the country's premier bourse in the scams of 1996 and 2010 is no secret. The growth of the market will be slow, steady and durable provided all concerned stick to the basic principles and objectives of demutualization of bourses.
So, with the banks not much interested to attract term deposits and the stock market not in a position to fulfil the expectations of the short-term investors, legally-earned money would naturally flow into savings tools.
However, the movement of money does leave an impact, good and bad, on the economy and the central bank is the agency that is well-placed to keep track of such movement, assess its impact and take remedial measures whenever needed. Money is also a very important issue for the government since the political masters' capacity to manoeuvre largely depends on money's strength and availability.
The increased investment by public in savings tools would relieve the government of the need for borrowing from the banking system and help create more space for private sector borrowers. But it would add to the cost of debt servicing by the government. In fact the government would be spending a big chunk of its revenue earning on interest payment. Such spending would naturally create shortage of fund for important areas. And it would compel the government to borrow more to meet that shortage. That is a vicious cycle in which the governments of most poor developing countries are entrapped.