LONG-TERM SAVINGS IN DISGRACE
MORE THAN 98% OF CITIZENS' DEPOSITS PAYABLE IN UP TO A YEARBanks are able to grow as quickly as clients allow them. At first sight this conclusion is connected with the credits they offer and which share rose from 25% to almost 60% within eight years, from the end of the financial crisis in the spring of 1997 till end-May 2005. The truth, however, is that they would have hardly achieve such growth if firms' and citizens' deposits had not increased significantly. Regretfully, the statistics allowing to trace the size of natural and juristic persons' deposits in credit institutions exists since 1999. It shows that six years ago they were BGN5.5BN, while in May 2005 they already amounted to BGN17.6BN. In other words, citizens' and companies' money in the banks more than tripled within that period. This increase is completely explainable for Bulgaria, because after the hyperinflation in 1997 the population had completely lost trust in banks. In the end of 1999 the number of households' deposits, according to BNB's statistics, was 9.2 million, and the money kept on them amounted to BGN1.86BN, i.e. the average size of a deposit was BGN202.According to a research of Bank Austria, which is the owner of the Bulgarian HVB Bank Biochim and HEBROSBANK, the average size of deposits per capita was BGN591 in the end of 2004. This was probably calculated by dividing the aggregate amount of citizens' deposits - BGN.97BN in end-2004 into 7,750,000 people (Bulgaria's population).Austria Bank's experts claim that according tothe savings per capita indicatorBulgaria rates tenth among 13 countries in Central and Eastern Europe (CEE). The average size of natural persons' deposits in this region is EUR1,331 per capita, while in the Eurozone it is EUR13,800. The Austrian analysts forecast that the average size of deposits in Bulgaria will double to reach EUR1,061 per capita by the end of 2008. The highest average size of deposits in the CEE countries was reported in Slovenia in 2004 - EUR4,908 and in the Czech Republic - EUR3,262, and the lowest - in Bosnia and Herzergovina - EUR352 and Serbia - EUR221.BNB's objective statistics also shows that in end-2004 the number of households' deposits in banks totalled 11.52 million, and the money kept on them amounted to BGN8.97BN, or BGN778 (EUR398.2). At that, the money is concentrated insmall-sized and very short-termsavings.Again BNB's statistics confirms that 87.7% of the savings are below BGN1,000. But what is more curious is that almost 95% of them are concentrated in current accounts and deposits with interest payment in up to one month. Citizens prefer these types of savings because they rely on getting each month the interest which the bank owes them for the deposited money, although it is not at all high. The interest rate on one-month deposits does not exceed 3% on an annual base, but Bulgarians obviously prefer to touch their yield. Financial analysts are certain that most citizens do not draw the principal of their savings and even add to it the interest accumulated for the passed period. That is why, the notion term of keeping has emerged in banking statistics in Bulgaria, which shows the real time period during which people keep their savings intact, although they could get higher yields from longer-term deposits.A fact, confirmed by liquidity experts, is that for more than 60% of the one-month deposits, the above-mentioned term of keeping is longer than a year. This practically means that banks may use up to BGN8BN of the deposits for launching medium- and long-term credits. If we add banks' equity capital which totalled BGN2.95BN in end-May, and their long-term loans from foreign financial institutions, amounting to BGN1.2BN, the aggregate amount they will have at their disposal for extending credits, repayable in more than a year will be BGN12.15BN.The problem is that the BGN8BN on one-month deposits are likea delayed-action bombthat could explode if the macroeconomic situation in the country - under the new Government, for instance, becomes unstable. There is a danger of people rushing to draw most of their savings after the first sign of uncertainty. Therefore, banks may cushion against such a threat by stimulating the population to invest its savings in financial instruments with a term of more than one year. Banks should offer higher yields to citizens and a possibility to receive money from their savings at least twice a year. A product with such characteristics arethe bondsSince 2002, although gradually, banks have begun to issue debt bonds, guaranteed by real estates. The first issues, launched on the market, had a par value of BGN3-5MN and their annual yield was some 7-8%, payable in two equal instalments each six months. Bulgarians, however, were not very enthusiastic about investing in this product. Moreover, citizens' mistrust was roused by the fact that they could not draw the invested money whenever they want to (even losing the interest), but should have to seek a buyer for their bonds and have no guarantees they could sell them at par value. However,debt securities were accepted with enthusiasmby insurance and pension funds, and by foreign investors as well, who seek opportunities to invest their free resources in sufficiently secure instruments with high yields. That was the reason why bank bonds found their market niche. By mid-2005 credit institutions launched on the market about twenty issues of debt securities and the aggregate par value of the paper exceeded BGN500MN. The repayment term rose to five years and the annual interest rate for some of them dropped to under 4 per cent. Bonds, however, did not solve the problem regarding the transformation of the population's short-term savings into long-term deposits. As of the middle of 2004 credit institutions have been seeking another approach, offering high interests on long-term depositsBut they scare those bank clients who suffered by the big crisis in 1996-1997 and not only them but their heirs, too. At the height of the 2005 summer heats and floods almost all credit institutions are already actively advertising an annual interest of 7-9% on their BG levs deposits with term exceeding three years. DSK Bank's interest on 12-month deposits in 5%, for instance, 5.5% for 2- and 3-year deposits, and 7.5% for 60-month deposits.The minimum size of citizens' 3-year deposits in United Bulgarian Bank (UBB) is BGN3,000. The annual interest rate is 6%, payable each three months. The bank offers an overdraft (a short-term credit), amounting to the size of the deposit or get a Maestro credit card with the same size of limit. However, citizens should be aware that the interest rates for the overdraft and the credit card are twice higher than the interest they get on their deposit. HVB Bank Biochim offers a special programme for long-term savings, called Biochim Invest. If one deposits BGN500 to BGN10,000 for 60 months, the annual interest rate will be 7.1 per cent. If you entrust BGN10,000 to BGN50,000 in the bank for five years, the annual interest will be 7.4%, and when the money exceeds BGN50,000 the interest rate will be 7.6% per cent. Post Bank offers 36-month (3-year) deposits on which 6% annual interest is paid for amounts up to BGN15,000 and 6.5% for deposits over BGN15,000.If holders of such savings need money they may draw a short-term loan, up to 90% of the deposited amount. First Investment Bank (FIB) offers to its clients the so-called Record deposit fro two or three years. The interest rate on it may reach 7.81 per cent. At the holder's will the bank may issue him a debit card and remit to it the money from calculated interest. While striving to attract more long-term deposits almost all banks resort toadvance payment of interestThe interest on standard deposits is paid at the end of the respective period - one month, six months, one year, etc. However, for almost a year now most banks offer their clients the possibility to get the interest on long-term deposits in advance. Post Bank and FIB give their clients an opportunity to draw the interest on long-term deposits each month, UBB pays it quarterly, and DSK Bank - annually. Despite all these strategems, tricks and bonusesused by banks to arose their clients' interest towards long-term savings, the effect is almost equal to zero. According to BNB's statistics for the first half of 2005, citizens' deposits with a one year payment term rose by only BGN58.8MN. This is a trifling amount, considering that within that period short-term deposits increased by BGN3.75BN, from BGN8.7BN to BGN12.45BN. The reasons could be the very low real income which saving deposits yield. Taking into account the annual 6% inflation in the country and the 7-8% interest payable on deposits, we could calculate that savings will in fact go up by only 1-2% annually. The week interest towards long-term savings could be also explained by the fact that only the more affluent and financially more literate people (acquainted with the Deposits Insurance Act) do dare to freeze a larger amount of money in a bank for a longer period. And with annual interest rates 7-8%, it is worthwhile to make a long-term deposit only if it exceeds BGN10,000. Such an amount yields about BGN750-800 a year, which is equal to six average monthly pensions of BGN133.3.This explains why most people with monthly incomes of BGN500 to BGN1,000 prefer to draw consumer credits in order to satisfy their current needs of household electronics and furniture instead of keeping money on a deposit. The only undeniable fact is that Bulgarians are already joining the consumer society, which within a few years will be caught in the nets of modern slavery - i.e. the credit cards, about which the BANKER weekly wrote in detail in the beginning of July (Issue 27).