The cash long idling in your bank account is due to acquire more value, thanks to a Reserve Bank of India move earlier this week to free savings bank deposit rates. Bankers say better returns are in the offing for depositors as competition will intensify.
"This path-breaking regulation will enhance and protect savings returns from the brunt of persistent inflation," says Rana Kapoor, MD & CEO, Yes Bank. The RBI has said banks will have to offer a uniform interest rate on deposits of up to Rs 1 lakh. For higher deposits, banks are free to offer differential interest rates. Experts believe the average interest rate on savings accounts will increase by 50 to 100 basis points (100 bps equals 1 percentage point) from 4% over the medium term. About 20-25% of total bank deposits are parked in savings accounts.
The Impact
For starters, interest rates can swing both ways. But experts say rates are unlikely to fall much because savings deposits offer the cheapest source of funds for banks and they would not want to lose by lowering rates sharply. A possible upshot will be product innovations linked to savings accounts and increase in user charges. In countries such as Canada, Japan, Australia, New Zealand, the UK and US, where interest rates have been freed, most savings bank accounts carry charges if the number of transactions exceeds a permissible level. Similarly, a number of banks in Hong Kong launched new products such as combined savings and checking accounts after savings deposit rates was freed in 2001.
The RBI thinks product innovations in India may spill over to operations such as branches, web-based channels and ATMs. Rates offered may differ based on the flexibility of operation of savings bank accounts and the degree of liquidity offered such as notice period for withdrawal, number of deposits and/or withdrawals allowed per month and percentage of amount that can be withdrawn in any given month, among others.
Should you Switch Banks?
YES Bank was the first to increase the interest rate offered on savings bank accounts by 2% to 6%. More will follow. But should you switch banks to take advantage of higher rates? "You should not be keeping huge amount of cash in your bank account in the first place," says financial planner Lovaii Navlakhi. Most experts advise against switching banks unless you happen to keep a substantial amount lying idle in a savings account.
If you still go ahead, check the fees. Most analysts believe that banks would offset higher costs by hiking fees for services. This can be in the form of higher lending rates for borrowers, transaction charges and increase in minimum balance requirement. The prudent way is to first gauge your usage pattern of banking services - do you frequently run out of cheque books or withdraw cash often. In that case, you need to also check what kind of charges banks levy for these services.
The second key factor is convenience. Savings deposits tend to be sticky for most since we use it for loan repayment, utility-bill payments and even investments. If you have had a long relationship with your bank, changing the account can be cumbersome. "There are also the benefits that come from the loyalty factor in the form of a free credit card or a faster loan sanction and one should not ignore this aspect when deciding whether to shift," says Navlakhi.
The rates will now closely reflect the policy rates. This means like any other deposit rate, savings rate will also fluctuate and a bank offering a higher rate today may not be the one always offering the best rate.
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