Rise of Sight Deposits

EghtesadOnline: The Central Bank of Iran said increase in sight deposits far outpaced term deposits in the first quarter of the current fiscal year (March 20-June 20), reflecting depositors’ reluctance to keep money in banks for extended periods.

News ID: ۷۵۰۵۹۷

02 August 2020

Total sight deposits rose by 780.9 trillion rials ($3.4 billion) in Q1 to reach 4,442.5 trillion rials ($19.4b), posting 21.3% growth. On annualized basis, sight deposits rose 70.4%, according to a CBI monthly monetary report published on its website.

This is while term deposits registered only 5.2% hike during the same period, growing by 968.6 trillion rials ($4.2b) to reach 19,536.62 trillion rials ($85b). Term deposits rose by 27.7% year-on-year.

Long term deposits stood at 11,981 trillion rials ($52b) by June 20, registering 4.3% growth and 30.2% on the annualized basis. Short-term deposits rose to 7,555.6 trillion rials ($32.8b), up 23.9% annually and 6.7% growth during the Q1.

Likewise, the total amount of Qarzol-Hassaneh (interest-free) deposits increased by 6.3% in three-month period to reach 1,539 trillion rials, also indicating 45.8% growth year-on-year.

The fact that growth in value of sight deposits far outpaced long-term deposits is seen as a sign that long-term deposits are increasingly turning into sight deposits, raising new concerns that the people may move their money to other financial markets in pursuit of higher returns.

Observer’s link the declining traction of term deposits mainly to the CBI’s contractionary policy to reduce the cost of money to banks and encourage the people to put their money in manufacturing.

Financial experts warn that the CBI delays in adopting contractionary policies could translate into a bigger amounts of long-term deposits turning into sight deposits. This is raising fears that financial markets may encounter new price shocks emanating from the huge volumes of money supply.

Higher Interest Rates Don’t Help

Alarmed by the dire consequences of such a phenomenon, the Money and Credit Council, the top monetary regulatory body, decided last month to raise interest rates. However it appears that tweaks are insignificant to make any change and entice depositors.

The MCC decided in mid-July to raise interest on one-year maturity deposits by 1 percentage point to 16%.

Likewise, interest on two-year deposits was set at 18%. On short-term deposits with 3-month maturity, the rate increased by 2 percentage points to 12%, the CBI website reported.

MCC approved 14% interest rate for six-month deposits, up 3 percentage points.

Under the previous interest rate framework, depositors could keep their money in banks only with one-year and six-month maturity dates. In the new rules, the CBI allows deposits with two-year and three-month maturity.

The CBI says the new rates are the maximum lenders can offer on deposits because higher rates will significantly increase the cost of money for banks. It says the decision is in line with efforts “to protect the value of the national currency” and “diversify bank deposits”.

Ineffective Policies

Observers say as long as high inflation persists and returns on stocks, gold and forex far outpace the paltry interest rates offered by banks, the subtle increase in interest rates will attract nothing but indifference of the people whose life savings are sinking at terrible speed.

“Galloping inflation is the main snag that has rendered such monetary policies ineffective,” to say the least, Mohammad Reza Jamshidi, the secretary-general of the Iranian Private Banks' Association said earlier.

Thanks to the mounting money supply directed toward financial markets, forex, gold and share prices have been soaring unprecedentedly.

Long-term deposits gained traction temporarily after the CBI decided to scrap overnight interest rates in January 2019. This obliged banks and credit institutions to pay interest on deposits on a monthly basis.

This move, economic observers presumed, would shift liquidity from short to long-term deposits, which in turn could empower banks and credit institutions to lend more to businesses and industries.

The expanding share of sight deposits partly explains depositors’ reluctance to keep their money in banks at current interest rates, which means a negative return given the current inflation rates and tanking of the national currency.

Overall average annual inflation in Iran stood at 26.4% in the 12-month period ending July 21, according to the Statistical Center of Iran. SCI had put the average annual inflation rate for the month that ended on June 20 at 27.8%.