Executive Summary

Chapter 1: Introduction
1.1 Origin of the report
Central bank and monetary policy course requires to prepare a term paper on
any recent circular published by central bank, under the supervision course
instructor. This report is based on the information and knowledge that we
gathered by doing the course and available information on books and internet
and print media.

1.2 Objectives of the Study

Bangladesh Bank has imposed the restriction on investment in 5-years term
Sanchayapatra using gratuity fund of institutions in an apparent motive to help
the government to reduce its burden of paying high returns on Sanchayapatra.
This restriction will also limit the sale of Sanchayapatra to institutional
investors so that Sanchayapatra can create more scopes for small and
individual depositors.
The objective of the term paper is to get familiarize with central bank monetary
policy and its implication over the economy. In such process acquire
understanding on the reasons and effect of such policy implications. Objectives
regarding this term paper are as follows:
General Objectives:
The general objective of this report is to fulfil the requirement course.
Specific Objectives:

To
To
To
To
To

identify the reason behind the policy change.

evaluate the implication of the policy
identify who are affected by the change in policy
forecast long term economic change due to the policy
identify if there is any negative impact of the policy.

1.3 Scope of the Report

This report helped us to understand the policy of the central bank and gave us a
clear idea on its impact and reasons. The selected topic will help us to
evaluating similar central bank policies that will help us to have better
understanding on the whole economy and take decisions according to the
forecast.

1.4 Methodology
There are two sources of data:
1. Primary Data
2. Secondary Data.
Sources of data
We have collected secondary data. We collected Secondary data from available
information on internet and media like websites, articles, newspaper editorial
etc.

1.5 Limitation of the Report

Due to time constraints for submitting the term paper I could not gather as
much information as we wanted to, but the information we have collected are
genuine and there is time constrain as well. The report is prepared according to
our understanding of the topic and the course. We are not experts on this sector
so report might have some mistakes.

Chapter 2: The Circular

Chapter 3: Background Study

3.1 Sanchaypatra
Sanchayapatra is a savings mobilization scheme of the government. At present
the following savings certificates are sold & encashed from the post office.
Different schemes of the saving instrument are:

5 Year Bangladesh sanchayapartra

Tin mash ontor munafa vittik sanchayapartra
Pensioner sanchayapartra
Paribar sanchayapartra

Sanchayapatra as a less-risky investment option' has become profitable due to

high rate of interest offered by the government when the banks are lowering the
interest on deposits. Interest on investment in 5-years term Sanchayapatra are
still above 11 percent and this high interest rate has raised demand for
Sanchayapatra. The central bank had initiated the scope for large-scale
investment in various Sanchayapatra last fiscal year to supply the government
more funds to meet budget deficit and reduce bank borrowing by the
government.

3.2 Interest rate in Sanchaypatra:

The interest rates offered on deposits by banks have been lowered constantly
over past years and has come down to single digit amid persistent sluggish
investment. On the other hand, interest rate on investment in savings
instruments are still above 11%. Currently, banks offer a maximum of 7 percent
interest rate for term deposits and it is a minimum of 11 percent for investments
in savings schemes. This circumstance causes a higher demand for the statesponsored saving instruments.

3.3 Investment of Sanchaypatra:

The central bank opened up the scope for large-scale investment on saving
instruments last fiscal to supply the government more funds to meet budget
deficit and reduce bank borrowing by the state.
However, due to the lucrative and safe investment opportunity the
governments borrowing from sale of various savings certificates exceeded the
target in a high margin in last three fiscal year. From July 2015 to May 2016, the
government took around Tk 31,000 crore from sale of savings certificates.
Which increased even more to the end of the fiscal year. The amount was more
than double the target set by the government for the fiscal year: it stood at Tk
33,688.6 crore -- the highest in the country's history -- against the target of Tk
15,000 crore.

FY
2013-14
2014-15
2015-16

Target Sales of
Sanchayapatra
4,971
9,056
15,000

Net Sales of
Sanchayapatra
11,707.30
28,732
33,688

Excess amount of
Loan
6,736.30
19,676
18,688

Source: The Daily Star Bangladesh

Sales of Sanchaypatra

2013-14

2014-15

Target Sales of Sanchayapatra

2015-16

Net Sales of Sanchayapatra

The government has to return the principal amount with high interest on
maturity of a savings instrument, which has been creating an extra financial
burden on the government.

3.4 Interest rate of Sanchayapatra and Bank Depost:

As the deposit rate offered by the bank is less than the rate of Sanchayapatra,
general people are being attracted mostly in investing in Sanchayapatra.
Moreover, there is no opportunity for profitable investment in alternative
sources, especially it is not profitable to invest in capital market for the time
being, so the interest of investment of gratuity fund in Sanchayapatra is
getting larger by different banks and corporate companies.

Table 1: 5-years term Bangladesh Sanchayapatra Interest Rate

Period (on completion of )

At the end of 1st Year ( if the
purchaser encash before maturity)
At the end of 2nd Year ( if the
purchaser encash before maturity)
At the end of 3rd Year ( if the
purchaser encash before maturity)
At the end of 4th Year ( if the
purchaser encash before maturity)
At the end of 5th Year

5-Year Bangladesh
Sanchayapatra
Rate of
Rate of
Total
Profit (%) SSP (%) Rate (%)
9.20%

0.00%

9.20%

9.95%

0.00%

9.95%

10.70%

0.00%

10.70%

11.45%

0.00%

11.45%

12.20%

0.99%

13.19%

Table 2: Interest rate on bank deposits (Monthly)

The most costly debt of the government of Bangladesh is getting loan from
selling Sanchayapatra. Because of this, the degree of paying interest of the
government in the budget is increasing. As the big part of the revenue
generated by the government is being used to pay the interest on
Sanchayapatra, the government has to lessen the budget allocation in other
productive sectors.

3.5 Interest paid on Sanchayapatra:

The government Paid back between July 2015 and February 2016 stood BDT
13176.70 crore in principal amount with interest of BDT 7096.50 crore to

Sanchaypatra investors. During the period, state borrowing from sale of savings
certificates reached Tk 19,890.55 crore against the entire fiscals (July 2015June 2016) target of Tk 18,000 crore.

3.6 Bangladesh Government Budget Deficit

Bangladesh recorded a Government Budget deficit equal to 4.70 percent of the
country's Gross Domestic Product in 2015. Government Budget in Bangladesh is
reported by the Ministry of Finance, Bangladesh.

Source: http://www.tradingeconomics.com, Ministry of Finance, Bangladesh

Source: http://archive.dhakatribune.com/bangladesh/2015/jun/04/fy16-budget-deficitnot-cross-5-gdp

Here we see in the figure that the Bangladesh government budget is deficit one.
So the government has to rely on the borrowing money. The government can
collect money to finance the deficit budget by selling Sanchayapatra, or by
taking loan from the bank.

3.7 Government Borrowing Plan

The government borrowed only around Tk 4,000 crore from the banking system
against the target of Tk 38,523 crore for fiscal 2015-16, meaning the banks
were sitting on excess liquidity.
The budget deficit in FY 17 has been estimated at Tk 97,853 crore or 5.0
percent of the GDP. The target of external borrowing has been set at Tk 36,305
crore. In 2016-17 fiscal, the government has set a target to borrow Tk 61,548
crore from domestic sources, including Tk 38938 crore from banks. The
remaining amount includes borrowing from the sale of savings instruments.
Borrowing from sale of savings instruments is widely known as non-banking
source to meet budget deficit.

3.8 Interest rate decline:

Data shows that the saving instrument is oversold each year. The popularity is
due to the risk free return of the instrument. However, the alternative
investment opportunities are not availed at similar rate. And government has
also got a massive amount of central reserve. Under such situation government
is more willing to channel the investment to other sectors rather than in the risk
free saving instrument. The interest rate is cut down in several occasions for the
very reason.

FY

Previo
us

Curre
nt

Five-year family savings

certificates
Five-year pensioner savings
schemes
Three-year post office savings
certificates
Bangladesh Savings
Certificates
Three-year profit-based
savings certificates

13.45
%
13.19
%
13.24
%
13.19
%
12.59
%

11.52
%
11.76
%
11.28
%
11.28
%
11.04
%

Reducti
on

1.93%
1.43%
1.96%
1.91%
1.55%

However, the investment keep soaring as people expects further cut down on
the interest rate and very much unwilling to invest in other investment
opportunities.

Chapter 4: Reason for the circular:

According to the Sanchayapatra Rules, 1977 (First Amendment 2002), investing
in five-year Bangladesh Saving Certificates from gratuity fund is not legal unless
the fund has approval from a tax commissioner. However, several number of
companies invested their gratuity fund in the saving instrument. Central bank
took up step to clarify and remind the rules and released the circular.

4.1 Investment of gratuity fund in Sanchaypatra

According to Association of Bankers, Bangladesh (ABB), almost BDT 5 billion
taka has been invested in Sanchayapatra by banks and corporate companies.
Among these funds, some companies and commercial banks invested their
gratuity funds in the national savings instruments but did not get any profit
despite several attempts. Whereas some made took out the profit along with the
investment and some invested fund is yet to be cleared and pending on
government decision.
The IRD has found different companies have invested gratuity funds worth Tk
2.72 billion in the savings certificates. Delta Brac Housing (DBH), Citi Bank NA
and Rupali Bank have encashed the savings certificates worth Tk 1.01 billion,
including profit. IFIC Bank, Dhaka Bank, Brac Bank, Prime Bank and Bank Asia
have encashed the instruments worth Tk 730 million but they were not allowed
to take profit.
Meanwhile, encashment of instruments worth Tk 960 million held by IFIC Bank,
United Leasing Company, Berger Paints, HSBC, Rupali Bank, Pubali Bank, Citi
Bank NA, Eastern Bank, Brac Bank has remained pending for the government's
decision.

4.2 Reason for unauthorized investment:

The corporate tax rate of Bangladesh is as below according to the Income Tax
Regulation:

However, the Tax from interest gain from the 5 Year Government Saving Scheme
(Sanchaypatra) is 10%. So the management and fund managers of the
corporate firms wanted to take on the advantage of lower tax rate.
Moreover, the interest rate of five-year Sanchayapatra is 12.2% with 99% social
premium. For example, any person will get Tk165.95 against his or her
investment of Tk100 after maturity period of the scheme. This is a very high
return and with no risk of default or loss as it is state sponsored. So fund
managers are keen to take the opportunity.
The reason behind such unauthorized investment is not yet clarified and
justified by the officials.

Chapter 5: Insight of the Possible Motives behind the

Circular
The central bank of Bangladesh has said in that article that this was option was
never available to the companies.

As this might be true, this opens up the

question what are the options if this takes place.

5.1 Investment Diversification

The article says that companies are not permitted to invest their gratuity funds
on the 5 year maturity savings bonds of the Bangladesh Savings Bureaus. In
the previous section we have discussed for the decision. Mainly the contributing
factors were that, firstly the central bank might want the companies to invest in
the commercial banks so that there is better investment opportunity on the
banks disposal which will keep banks more competitive and keep the operation
of multiplication of money done by these banks smooth. This operation will also
keep the inflation on a balance making the economy operate in tranquility.
Secondly, the companies can invest the money of the gratuity funds on the
share market. Bangladesh stock exchange is at its infancy. This market is not
mature like the established markets around the world. This is why there is a
need for widespread investment in the stock exchange. If most of the
companies invest in the stock market the market will have enough investment
to function properly. Another reason is that these companies are financially
literate which makes them valuable investors. The decision taken by them will
give the normal investors hope to invest in the stock market and create a
positive cycle of trust within the system.

5.2 Arguments for allowing investment of Gratuity Fund in

Sanchaypatra
Now, let us discuss the opposite part of the options. If the central bank allows
the companies to invest in savings bonds the benefits are listed below

1. This money can be used by the government: As it is known to people who

read the budget that our budget is of deficit. Deficit means that the earning by
the government is dwarfed by the expenses. According to the budget of fiscal
year 2016-17, the deficit was BDT 39 Billion. This money will be arranged by the
government through domestic loans, foreign aid and foreign loans. These loans
are not cheap and will cost the government a huge sum in interest payments.
This all can be avoided if the companies are allowed to invest their gratuity
funds in the 5 year maturity savings bonds offered by the Bangladesh Savings
Bureau. These companies will be helping the government fund the expansion
projects of the government. This will result in less budget deficit.
2. The companies will enjoy a riskless investment: the gratuity funds can be
invested in the commercial banks. These banks will not provide the hefty 13.5%
annual interest that the savings bureau is able to provide. Now that being said it
will also provide the companies to save a lot of money as the processing fee will
not be high enough and the companies can enjoy the gratuity funds interest
with an ease. On the other hand, they can invest the money in Stock market
where they can achieve more than the profit offered by the savings bonds.
Although this investment is a bit uncertain as there is a possibility that the
companies will not make the right decision. Although the stock market can post
a higher interest rate than savings bonds it will not be same throughout the
plane. Some companies will be getting lesser profit against their investment
compared to the other companies. This kind of disparity will harm a company
portfolio. In addition if the stock market has a downfall the companies will have
to report a loss which will be devastating towards the investors. To overcome
this problem the companies will have to employ a separate division which will
overview the stock market investment and monitor the stock market behavior
overtime which will make the company spend more on the investment. This will
lessen the impact of the profit posted. Another way can be hiring an investment
banker but again the investment banker will take a commission out of the profit
if there is a profit to post. Additionally, the money is subjective to tax rebate if
invested in savings bond which will be beneficial to the companies.

5.3 Economic Outlook of investment in Sanchaypatra

These two are the major economic benefits posted by that gratuity funds should
be invested in the 5 year maturity savings bonds offered by the Bangladesh
Savings Bureau. Although this option seems lucrative for both parties there are
some consequences.
1. Inflation: According to the Quantitative Theory of Money inflation takes place
when the money supply is not adjusted with the price level with the velocity of
money and growth rate. The mathematical expression is given below:PV=MQ
Where;
P= Average price of commodity
V= Velocity of money
M= Money supply
Q= Growth rate of a countrys economy
This theory suggests that, if the money supply is increased uncontrollably
without the price level being adjusted in accordance there will be inflation.
Although a little inflation of about 6% - 7% is healthy for the economy and some
might say even necessary for the growth of the economy. Inflation higher than
that will cause massive harm to the financial infrastructure of the country.
In case of massive investment of the companies from their gratuity funds on 5
year maturity savings bonds, government has to pay this massive amount of
interest to the companies without delay. This means that the government has to
increase the money supply irrelevant of what the growth rate the economy is.
This profit has to be paid relentlessly.
Although the government will have increased the money supply eventually they
would have done it slowly and in a mature way. This change would have not
caused inflation greater than 7%.

2. The IS Curve: According to the IS curve the total expenditures of the economy
is comprised of government expenditure, investment and taxes. Now the main
reason the government might want the gratuity funds to be invested in the
savings bonds is to lessen the deficit and increase growth.

But this same effect can be achieved by increasing the investment by diverting
the gratuity funds to investment banks, commercial banks and the stock
market. As these funds will be invested into the economy eventually and it will
result in the same amount of growth.

3. Increase in Tax: The gratuity funds invested in the commercial banks and the
investment banks are highly taxable such that these will increase the
government expense.

Chapter 6: FINDINGS AND CONCLUSION

In the budget of current Fiscal Year of 2016-17, the government has set the
target of Taka 19,610 Crore to take loan by selling Sanchayapatra to finance
the budget deficit.On the other hand, Taka 38,240 Crore has been allocated to
pay the interest of internal debt in the current Fiscal Year, remarkable part of
which will be used to pay the interest of Sanchayapatra. So it was very
important to take strict measures on the part of Bangladesh government and
Bangladesh Bank so that the loan from selling Sanchayapatracannot exceed
the target again in the current Fiscal Year andthe interest cost by the
governmentcannot be increased abnormally. And they did their job very well and
published the notice on

restriction

of

investment of gratuity

fund

in

Sanchayapatra.
Though the central bank did not prohibit investment of gratuity fund in
Sanchayapatra before as it was helping the government to lessen the pressure
on taking loan from the bank, but very recently Bangladesh Bank has again
instruct banks and corporate companies reminding them of the old lawto
conform

the

rules

Sanchayapatra.

of

prohibition

of

investment

of

gratuity

fund

in

REFERENCES
http://www.bangladeshpost.gov.bd/financialservices/savingcertificate.asp
https://www.bb.org.bd/econdata/intrate.php
http://www.daily-sun.com/home/printnews/153951
http://www.thedailystar.net/op-ed/finance/sanchayapatra-trojan-horse-166288
http://www.tradingeconomics.com
http://www.thedailysangbad.com/business/2016/08/02/77685
http://www.prothom-alo.com/economy/article/931273/
http://print.thefinancialexpress-bd.com/2016/10/30/155394
http://www.nbr.gov.bd/contents/publication/50.pdf
http://archive.dhakatribune.com/banks/2014/dec/23/savings-certificate-profitdenied-gratuity-funds
http://print.thefinancialexpress-bd.com/2016/10/30/155394
https://www.bb.org.bd/mediaroom/circulars/dmd/jul252016dmd06.pdf
http://www.daily-sun.com/printversion/details/153951/BB-restricts-gratuityfunds-in-govt-saving-schemes

http://www.bangladeshpost.gov.bd/financialservices/savingcertificate.asp
http://www.bssnews.net/newsDetails.php?cat=2&id=457234&date=2014-12-22
http://www.thedailystar.net/op-ed/finance/sanchayapatra-trojan-horse-166288
http://www.thedailystar.net/op-ed/finance/sanchayapatra-trojan-horse-166288
http://archive.dhakatribune.com/bangladesh/2015/jun/04/fy16-budget-deficitnot-cross-5-gdp