Banks risk losing time deposits over higher savings interest rates
• Banks delay adjusting interest on fixed deposits
• Rate mismatch could induce liquidity squeeze
The recent increase in minimum interest rates on savings accounts could see time depositors liquidating their holdings in the coming months in preference for the former, market intelligence suggests.
The Central Bank of Nigeria (CBN), recently, reviewed the negotiable minimum savings interest rate from 10 per cent of the monetary policy rate (MPR) to 30 per cent and called on the deposit money banks (DMBs) to comply.
The directive has effectively pushed the floor of savings interest rates from 1.4 per cent to 4.2 per cent with an indirect effect on time deposits.
The commercial banks have complied with the new regulation with some offering as much as two per cent above the minimum benchmark for premium customers.
For instance, a new generation bank has sent an email to its customers informing them of the revised rates with a 6.2 per cent offer for a deposit of at least N200 million.
The graded offering benchmarks deposits of less than N100, 000 at 4.2 per cent, while higher deposits attract higher rates.
Yet, the less flexible time deposits remain sticky at between two and four per cent interest rates, making savings more competitive even in terms of returns.
Usually, fixed deposits who will have to lead their funds untouched until the maturity date, are compensated with higher interest rates.
In June (two months before the new directive, which reversed an earlier review in 2020), a one-month deposit averaged 3.48 per cent per annum.
The rate was 210 basis points (bps) higher than the 1.38 per cent average interest paid on more savings deposits, which are considered the nearest liquid assets to cash.
In the same June, two and three-month time deposits, according to data provided by the CBN, attracted average interest rates of 4.55 and 4.97 per cent respectively.
Findings showed that some DMBs are still offering as low as two per cent for an N10 million one-month fixed deposit. The same amount attracts a minimum of 4.2 per cent return in line with the new regulatory provision. A second-generation bank offers 6.55 per cent to customers willing to part with the amount for savings.
Savings customers are allowed to make four withdrawals in a month and still get the accrued interest on the balance at the close of the month. On the other hand, deposits in time (known as term deposit accounts), though also considered short-term, are locked up in the account till the maturity date.
The sterilisation period could be a month, two months or even a few years depending on the terms of the agreement. Within the period, the bank has unfettered access to the money for intermediation. The customer could request to call off the contract and pay the relevant penalties, which include forfeiting the interest.
Hence, time deposits are considered a more stable source of funds for banks, a feature that is priced into the higher interest. But this logic is being reversed in Nigeria’s financial system as the banks delay adjusting the prices of time deposits, which are largely negotiable, unlike savings that attract statutorily minimum rate.
The Guardian learnt yesterday that the financial system is already paying dearly for the mismatch in short-term deposit pricing. A marketer in a leading bank said requests for liquidation have risen in the past one week as customers have seen better bargains in savings.
Though the situation has not reached a crisis level, there are fears that if stable funds continue to dry up, the system may run out of stable funds, which provide a buffer and risk a liquidity squeeze.
Another banker said players are working on reviews on the subsisting interest schedules on fixed deposits. On how long the review would last, he said, that would be determined by how important fund mobilisation appears to the management team of the banks.
Nigeria banks tend to collude rather than compete in interest rate determination in recent times. This suggests that the challenge could continue till one big bank brave the odds and raise returns on fixed deposit funds.