As soon as the deregulation of interest rates on deposits was announced by the Reserve Bank Of India (RBI), I thought that it would take sometime before the banks warmed up to the idea.
But I stand corrected as three banks have already started the interest war on your deposit accounts. And more will follow.
I suspect this will lead into some of the best interest rates on savings accounts in 2011 – something which has not been seen before. A good end to the year I guess !!
Deregulation of interest rates on deposits
Before the announcement was made, all banks in India used to payout the same interest rate on your savings account. That was 4% and was fixed by RBI.
This regulation now means that RBI will allow banks, effective November 1st 2011, to fix their own interest rates on deposits or savings account. This has led to the current war on higher interest rates – but let us come to that a bit later.
This comes with a caveat for the banks though. They are :
The banks will need to offer a single rate of interest on deposits less than Rs 1 lakh. The banks are free to decide this rate but they need to offer the same rate to EVERYONE whose deposit is less than Rs 1 lakh.
For deposits of more than Rs 1 lakh, the banks are free to decide on slabs and interest rates for these slabs. So, for a slab of Rs 1 lakh – Rs 3 lakh, the banks could offer say 6% rate of interest and for slabs of Rs 3 lakh – Rs 5 lakh, it could be 7%. So banks can decide the slabs themselves and the interest rates for these slabs but within a slab, the same interest rate needs to be given to everyone.
The current state
Soon after the announcement, three banks raised their interest rates. In fact, hours after this news, Yes Bank made it’s intentions loud and clear. Then Kotak Mahindra bank has come out with a full page ad in The Times of India promoting the new rates, so you can imagine the importance banks are giving to this.
Yes Bank was the first to kick into action with an interest rate of 6% for all deposits. This was followed by IndusInd bank. With a 6% rate on deposits for more than Ra 1 lakh and 5.5% for less than Rs 1 lakh. The third was Kotak Bank with the same rates as IndusInd bank. It was expected that these banks will move first as these banks don’t have much to show in the name of retail deposits.
Large banks like SBI, PNB, HDFC, whose savings account deposits account for a large portion of total deposits saw their shares lose value on the stock markets after the deregulation of interest rates announcement came in.
In the coming days, expect more smaller banks to join the bandwagon with attractive interest rates on deposits.
Should you move to a bank with higher interest rate ?
Before you jump to the bank which offers a high interest rate. Please note that your savings account better have a lot less money parked in it when compared to other investment avenues. If this is not the case and most of your money is in deposits, then you are in urgent need of some good advice and financial planning.
Anyways, coming back to what this topic of deregulation of interest rates. In case your savings account has less money parked in it, you need to think. Whether it makes sense to move lock, stock and barrel to the new bank? As it is offering a higher rate. What happens if you move and the bank you moved from also offered a higher rate? Or what if the new bank you moved to actually ended up slashing the interest rates after a quarter?
Wanting to earn more on so less money might not really be worth the effort.
Another thing to note is that this move by RBI will actually increase the cost for banks. If banks give with one hand, they simply take away from the other. (13 hike in key rates since January 2010, anyone ??). So while with one hand they increase the interest rates on deposits. On the other they might increase the cost of letting you maintain your account with them.
Loosely stated, that means that they could end up asking you to keep more money with them. As the minimum required in the savings account. Or they might begin charging more for loans or the cheque which you use profusely.
Also, are you comfortable to throw away the rapport? That you might have built with the beautiful lady at the front desk. When shes says with a smile – “How may I help you today, sir ?”.
You decision to earn a tad more because of the deregulation of deposit rates is dependant on these factors.
What would you do ?
Radhey,
This is a welcome move by RBI. Though 2% interest will not be benefit the account holder much unless they have lakhs and lakhs of rupees in their savings account, but still it will create competition between banks and in the end the customers will be rewarded.
I personally will not switch over to another bank for additional interest on my savings account. Instead of keeping money idle in savings it would make sense to open an FD and earn 9-10% interest.
Rakesh
@Rakesh, That is right Rakesh – most of the investors do not realize that at all. They will jump to the other bank even if it is offering a incremental interest rate. With so much pain to go through, I am not sure whether it is worth the effort when good financial planning dictates that only a small amount of money should be in savings account.
This just gave a boost to the (already existing) competition among various banks. But banking has become a business for the bankers; like you said on one hand they are rising the interest rate on savings account whereas on the other hand they are going to charge for the services they provide..one of the service I remember to hear in news is Internet banking. So there is absolutely no point in switching banks over this petty issue.
Any idea since when it is going to be applicable?
And as a matter of fact RBI failed miserably to control the inflation even after rising the repo/reverse repo rate limitlessly.
@Sudip D, Ref: “…banking has become a business for the bankers” – I think this has always been the case. The fact that most (if not all) banks are listed on stock exchanges makes that amply evident that they are here to earn for themselves and their stakeholders. The banks are entitled to earn as any other business does and if one feels that a given bank is way too heavy on it’s fees and charges, there are plenty of other options available in public sector and private banks.
Banks themselves are in fierce competitive market today and I don’t think any of them would be able raise their fees or charges without providing matching services. As far as switching banks is concerned, we need to consider the complete picture by understanding the pros and cons of such move and I think trivial issues such as nominal additional interest on savings account is not worth the hassles.
@Jaswinder Singh, Yeah, investors in India are spoilt for choice no doubt. You don’t like 1 bank, you move over to the other !
@Jaswinder Singh, Hi Jaswinder..
You have very rightly said about everything..specially about the listing of banks on the stock exchange & because of this the necessity for them to earn profits.
One never know when RBI will withdraw this deregulation act. And TRUELY unpredictible what it will come up with next!
I think today everybody’s concern is when will the interest rates on loans will come down like it was few months back?
@Sudip D, Didn’t quite get the question on “Internet banking” – what did you meant by that Sudip ?
@Radhey Sharma, Well it was like the banks (not specified) will charge for using Internet banking like transfering funds, online payment of bills, etc.
@Sudip D, Oh, yeah you are right about that – they might end up doing that eventually but it is not clear at this point of time when.