Galim Khussainov
Inflation and the tengeBankingLending and mortgagesTaxationEconomy and public policyManagement

Banking · 2 min read

Deposit Rate Caps and the Blurred Line Between Deposits and Current Accounts

Translated from Russian with the help of AI. Original: Russian version

Why deposit rate caps and the blurred line between a deposit and a current account expose banks to liquidity risks and deposit outflows, especially during currency market turmoil.

Interest rates on household deposits

Interest rates on household deposits are currently capped at 10% per annum in tenge, while the cap on dollar deposits is 3%.

The cap was introduced to prevent banks from raising household deposits at unjustifiably high rates and thereby increasing the risk to the bank.

However, such a cap works only in a normal economy, not in the kind of storm now hitting the currency market.

It is genuinely hard to say whether the rate on household deposits should be raised, since all banks would automatically raise their rates: tenge liquidity is extremely scarce.

On the other hand, the National Bank of Kazakhstan (NBK) itself offers 17% per annum, and during the crisis repo rates in the market soared to as much as 100% per annum.

Kazakhstan's concept of a deposit is also distorted, to the point that it is hard to call these products deposits at all.

Once a minimum amount is set, say KZT 10,000, everything above it is effectively not a deposit but money sitting in a current account, which the client can freely dispose of. This allows banks to pay interest of 10% on what are in fact current account balances.

Any negative news about a bank, or any rate increase, automatically triggers flows of funds between banks, harming some and boosting the liquidity of others.

This distortion in the concept of a deposit causes serious problems for the banking system. Everyone still remembers the consequences of the SMS attack on second-tier banks.

I would propose that the National Bank do the following:

  1. Redefine the concepts of a deposit and a current account. Deposits should be divided by term, and withdrawals before maturity should be prohibited, or permitted only with forfeiture of interest.

  2. Differentiate deposit rates by term: the longer the term, the higher the rate.

  3. Raise rates on tenge deposits and set the maximum rate equal to the rate at which the National Bank itself lends money to banks.

Published in: Facebook, 25 November 2015

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