New rules on Belarusian deposit market will reduce people’s interest in bank deposits

Decree No 7 of November 11^th, 2015, has introduced irrevocable deposits, early termination of which would be impossible without the bank’s agreement. This regulation is in line with the National Bank’s policy envisaging forming long-term resource base of banks. In addition, as of April 1^st, 2016, the population will need to pay an income tax on most common household deposits. These measures may lead to withdrawal of funds from the banks by the population and paralysis of the banking system.

On November 12^th, the classification of bank deposits in Belarus changed – envisaging only revocable and irrevocable deposits. Irrevocable deposits would not allow early termination of the deposit agreement without the bank’s consent. In addition, as of April 1^st, 2016, yield from national currency deposits with maturity period under one year and from foreign currency deposits with maturity period under two years will be liable for income tax of 13%. The tax payments will be made by banks after the accrual of the interest income.

These measures are in line with the National Bank’s policy envisaging forming of long-term resource base. As of July 2015, payments to the fund of obligatory reserves for ruble deposits of individuals and legal entities were equalized, which increased the cost of banks borrowing from the population. In addition, the National Bank has been implementing a policy of gradual reduction of interest rates on borrowed resources. These measures have led to a partial outflow of speculative capital from ruble deposits. The volume of term rouble deposits has been reducing for five consecutive months, totaling BYR 6.5 trillion (18.5% of their volume) on June 1^st, 2015.

The new regulations will reshape the deposit market. In September 2015 more than 73% of the new ruble deposits have been placed for a period of up to one year. The upper margin for interest rates on revocable deposits in national currency is projected at 25% per annum. This interest rate is not very attractive for most depositors. After April 1^st, 2016 their yield will be reduced by the income tax volume, which is likely to provoke a further outflow of national currency deposits.

The banks are not afraid to lose rouble liquidity and the National Bank has been consistently getting rid of depositors who are not ready for long-term deposits. The National Bank is mainly worried about the negative reaction from owners of currency deposits. The volume of term deposits in foreign currency of the population is USD 7.8 billion, which is 1.7 times more than Belarus’ gold reserves. If a part of depositors decides to close their accounts in banks, the banks will be unable to return deposits, the banking system will be paralyzed, additional restrictions on deposits will be introduced, leading to a panic on the currency market.