Banks take a loss on time deposits in favor of greater interest rates on savings

Market intelligence implies that time depositors may sell their holdings in the future months in favor of the former due to the recent hike in the minimum interest rates on savings accounts.

The negotiable minimum savings interest rate was recently increased by the Central Bank of Nigeria (CBN) from 10% of the monetary policy rate (MPR) to 30%, and the deposit money banks (DMBs) were urged to comply.

With an indirect impact on time deposits, the rule has effectively raised the floor of savings interest rates from 1.4% to 4.2%.

Commercial banks have complied with the new regulation, with some offering premium customers up to 2% more than the required benchmark.

For instance, a new generation bank notified its clients by email of the updated rates and offered a 6.2 per cent interest rate in exchange for a deposit of at least N200 million.

Deposits under N100,000 are benchmarked at 4.2 percent in the graded offering, while deposits over N100,000 are rewarded with greater rates.

Savings are more competitive even in terms of rewards because the less flexible time deposits are still stuck at two to four percent interest rates.

Fixed deposits often receive higher interest rates because they must remain untouched until their maturity date.

A one-month deposit averaged 3.48 percent annually in June (two months before the new order, which overturned an earlier review in 2020).

The rate was 210 basis points (bps) greater than the average interest rate of 1.38 percent paid on larger savings accounts, which are regarded as the most liquid assets next to cash.

According to information released by the CBN, two and three month time deposits in the same June received average interest rates of 4.55 and 4.97 percent, respectively.

Findings demonstrated that certain DMBs are still providing rates as low as 2% for a one-month fixed deposit of N10 million. The same amount, in accordance with the new regulation rule, receives a minimum return of 4.2%. A bank founded in the second generation gives 6.55 percent to consumers who are ready to deposit the required amount.

Customers with savings accounts are permitted up to four withdrawals per month while still receiving the interest that has accumulated on their balance at the end of the month. While still considered short-term, time deposits (also known as term deposit accounts) are kept in the account until the maturity date.

Depending on the terms of the agreement, the sterilisation period could be one month, two months, or even several years. The bank is free to use the funds for intermediation during the time. The customer could ask to terminate the agreement and pay the associated fees, which include losing the interest.

As a result, time deposits are valued at a higher interest rate since they are thought of as a more reliable source of funding for banks. In Nigeria’s financial system, however, this logic is being inverted as banks postpone raising the rates on time deposits, which are generally negotiable in contrast to savings, which are subject to statutory minimum rates.

The financial system is already paying a high price for the disparity in short-term deposit pricing, The Guardian learned yesterday. Demands for liquidation have increased during the past week, according to a marketing at a major bank, as customers have seen better savings deals.

There are worries that if the system runs out of reliable money, which act as a buffer and run the risk of a liquidity squeeze, even though the situation has not yet reached a crisis level.

Another banker claimed that participants are revising the current interest schedules for fixed deposits. He explained that the length of the assessment would depend on how significant fund mobilisation is in the eyes of the bank management.

In recent years, Nigerian banks have a tendency to cooperate rather than compete when setting interest rates. This implies that the problem can persist until one major bank takes a risk and raises rewards on fixed deposit money.

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