What the banks are doing to counteract the taxation of gains from interests on bank deposits

• The new taxation measures are forcing banks to search for new solutions to attract customers, after raising their interest rates as a first step

• The payment of the interest rate in advance, one of the solutions used to compensate the effect of the taxation of earnings from bank deposits

Loan brokers say that banks must look for solutions to attract funds from customers, after the new taxation measures introduced by the Government. Liviu Andrei, the manager of Alliance Finance Broker, said: "Banks need to come up with solutions to keep their customers interested in bank deposits".

Some banks have already launched promotional offers intended to compensate the taxation of earnings from bank deposits, such as the payment of the interest in advance, upon creation of the term deposit. "I am sure that banks will come up with other tempting offers to attract and keep the savings of the population", Liviu Andrei says.

After the introduction of the new tax, banks were forced to slightly raise the interest rates. The revision of the inflation target following the modification of the VAT to 24%, will have a greater impact on the interest rates offered to customers for their deposits, the broker considers.

Ruxandra Andrei, the manager of "FinZoom" said that the raise of the VAT does not directly affect the interest rates on deposits, but rather their true return, i.e. whether they beat the inflation rate or not.

She mentioned that a very important aspect is the automatic correlation between the price at which liquidity is purchased (interest rates offered on deposits) and the one at which liquidity is sold (interest rates for loans). "As a result, the promotional interest rates offered on deposits will most definitely influence the interest rates charged for loans", says Ruxandra Andrei.

Radu Graţian Gheţea, the president of the Romanian Banking Association, said that the banks" reaction was to raise interest rates, upon the announcement of the new taxes.

"We are not surprised at this taxation of interest paid on bank deposits, it is happening in several countries and it has happened in Romania in 2008", said Mr. Gheţea.

He said that it is almost certain that banks will come up with new savings products to maintain public interest in bank deposits.

Ruxandra Andrei, "FinZoom", said: "A first positive sign is the fact that the announcement of the taxation of interests paid out on deposits did not cause customers to rush to withdraw their money from banks (except for some isolated cases).

Ruxandra Andrei said that deposits are savings rather than investment instruments, and therefore the only thing that can be expected of them, especially in this period of recession, is to exceed the inflation rate to avoid the devaluation of the deposited amounts.

Also, in terms of awareness and understanding of the product, terms deposits are the most popular savings instrument in Romania.

The other savings or investment instruments are very little known and require above average financial knowledge, but they are still not exempt from taxation.

Their benefit is the fact that they offer higher returns than term deposits, with a higher chance of providing their owners with a return that beats inflation and the taxation rate.

Liviu Andrei, the head of Alliance Finance Broker, also considers that even though the population would have other instruments for saving or multiplying money, the bank interest rates are still the favorite investments. In his opinion, by using bank deposits, people avoid the risks inherent to buying stocks or the sophistication involved in acquiring state bonds or investments in gold.

Radu Graţian Gheţea considers that the stock market is not a good solution for big gains. "See how the stock market is doing. In my opinion, it is doing poorly because the economy is also doing poorly", Mr. Gheţea concluded.

On the other hand, Ruxandra Andrei says that most people don"t have any money to save. "And most of those that do, don"t trust the banking system due to the lack of basic knowledge on bank products", she says. Banks are partly to blame for this because for a long time they did their best to keep their customers in the dark by providing the minimum legally required information to their customers concerning their products.

A recent study by the Institute for Research on Quality of Life shows that 65% of the population barely makes their expenses, and 61% are left without any money at the end of the month. Also, out of those who say that they succeed in saving part of their monthly income, 75% say that they prefer keeping their money at home, which indicates the low degree of financial education (30% out of a maximum of 100%).