Central bank governor advises savers to join funds

AMID falling interest rates, Bank of Thailand governor MR Chatu Mongol Sonakul has advised savers to turn to low-risk mutual funds for better yields rather than putting their money in bank deposits.

His advice comes after more than 2,500 people scrambled to subscribe to government bonds yielding about 5.47 per cent in net interest a year. A total of Bt10 billion in government bonds were snapped up last week in a matter of hours.

It reflects savers' desperation for low-risk, yet stable returns on their savings, which now only attract interest of 2.25 per cent when languishing in a bank savings account -- the lowest rate in Thai banking history.

But Chatu Mongol said that from now on Thai savers need to improve their education in personal finance. ''Investment in low-risk property funds might be an alternative for savers who do not want to take risks. You cannot expect interest rates to return to the same levels as in the past,'' he said.

Chatu Mongol added: ''If savers would like to escape the low interest rate trap they should look for other low-risk investment options, which are not reliant on interest yields. Whether interest rates will fall further depends on economic conditions and whether we can continue to maintain a trade balance surplus.''

With the central bank's plan to introduce inflation targeting, savers will be looking at the inflation rate as a benchmark, which their interest returns, as a rule of thumb, must beat by at least 2.50 percentage points.

If the real interest rate stays at 2.50 per cent, it means that the one-year deposit rate should ideally be around 4.9 per cent, against an inflation rate of 2.4 per cent this year.

''If we target inflation at about 3 per cent, short-term interest rates will not stay too high above the inflation rate, and is likely to fall below the historical rates which is more in line with the economic conditions,'' the central bank governor said.

''At the same time, long-term rates, such as bond rates, will also fall proportionately. And the bank spread will also narrow,'' he added.

Interest-rate-spread -- the differential between deposit and lending rates -- remains persistently high at about 4 per cent in the Thai banking system, reflecting the lack of competition and the inherent problems of the banks themselves.

By international standards, the bank-spread should stay around 1 per cent, forcing banks to improve their services and make more money from fee-based incomes.

Chatu Mongol said over the next 10 years, it is possible that the interest-rate-spread will fall to 1 per cent or just above, because of commercial banks' profitability, particularly the profitability of their provincial branches.

At present, only 30 per cent of bank branches are making money, while the remaining 70 per cent are not competitive but are required to stay open to support the government's decentralisation policy.

Moreover, banks are subject to a 3.3 per cent specific business tax levied by the Finance Ministry, which adds to their operational costs.

Chatu Mongol said, in developed countries most bank branches are profitable due to widespread urbanisation, while the Thai bank branches are mostly losing money because they are situated in underdeveloped provincial areas.

BY ANOMA SRISUKKASEM and

THANONG KHANTHONG