Strange things are happening in the sector of bank credits. Trade banks are competing to increase the interest rates for deposits. We have touched upon this issue in our previous publications, but it is worth discussing it again as the process still continues.
The growth of deposit interest rates would not be strange if in parallel with that process the interest rates for credits would grow as well. However, these processes are moving in different directions and the interest rates for credits are going down. At first glance nothing bad is happening, especially for depositors. However, if we look into it deeper, we will be more skeptical to this process. For long-term and educated investors high interest rates may cause caution from the point of view of security. Besides that, to increase the price for attracting resources means also to increase the interest rates for credits, which is unacceptable in consideration of the current situation in the market.
In case of deposits there is another factor besides the interest rate too, which is the condition of collecting the deposits back before the planned term. The difference of a bank account that also brings interest rates on the money on it but you can cash your money at any time and deposits is the fact that the interest rates for deposits are higher but the depositor cannot take the money back before the planned time. Or, they can collect their money back but without the agreed interest rates. Depositors are not interested in doing so because if they take their money back before the time, they will not make any money. People that have money but are not sure if they will not need this money in a shorter term do not want to deposit their savings.
Banks understand this fact very well and in order to attract clients they also offer certain interest rates in case if their clients want to collect their money back before the time.
For example, recently Conversebank announced about “Arev” promotion, which is valid till May 31. During this time the bank takes deposits in AMD for one year and with 12% interest rate, and the minimum amount of deposits should be 200,000 AMD. Meantime, the bank offers that if their clients collect their money back during three months, the annual interest rate will be recalculated and reduced to 6%, and if they take their money during six months, the interest rate will be 8%.
About one month ago such promotion was announced by the Armenian Development Bank. According to this promotion, the bank accepts deposits in AMD, with 14% interest rate and for two years. Deposits in USD are accepted with 10%, and in Euros – 8% interest rate. The minimum amount of deposits is 500.000 AMD, and the maximum amount is 50.000.000 AMD. If in six months after the agreement the deducted amount is not less than 50% of the deposit, the interest rate is recalculated at 12% for AMD, 9% for USD and 7% for Euro.
In the end of last year Anelik bank announced a promotion, according to which the bank was offering 12.3% interest rate for deposits in AMD and also depositors could deduct and add their deposit at any time without having the current amount interest rate changed.
There are reasons to assume that this competition will continue. It is absurd but the tendency is moving in a direction, when the difference between deposits and current account interest rates will disappear.
Those banks that don’t have problems with attraction of resources through increasing interest rates are complaining about this competition. For example, the president of Armeconombank board of directors Armen Nalchajyan said in a recent interview that the dumping policy on the part of certain banks established with foreign currency is hitting the business of local banks. “In order to attract clients from other banks they are offering high interest rates for deposits and low interest rates for credits, which is out of any logical economic calculations. In order to understand this we can analyze the rates for interest rate incomes and expenses they have. We are for fair competition because any dumping has its lower limit and the misbalanced market will start a reverse process in some time and will hit the participants,” said Nalchajyan.
The most interesting thing is that the banking system is considered to be the most developed and stabile sector in Armenia and there is a union of banks, as well as rules of business. However, they are not able to do anything against the dumping policy.
It is difficult to say how long this process may continue and what the results may be. Anyway, depositors don’t lose anything from it at this point. Who is losing? Do the banks lose as they give money with low interest rates and take money with high interest rates? Of course it is naïve to think that banks may lose. In a word, depositors should not be happy very much because they must know when free cheese (in this case higher interest rates) is usually offered.