Awesome News for Savings Account Holders

In one of my earlier posts Good News for Savings Account Holders I had explained the fact that Savings account interest rates have been hiked to 4% from the 3.5%. Recently the Reserve Bank of India (RBI) came up with another blockbuster announcement.

What is this Announcement?

Banks can set their own rates for Savings Accounts

This means that, banks can essentially set the rate of interest they choose to pay for money held in savings accounts to their customers.

What does this mean?

This means that, you are not stuck with the flat 4% rate of interest for savings accounts across all banks. Banks can decide what interest they wish to pay on savings accounts to attract customer deposits.

Earlier, since the rate of interest was a flat 4% in all banks, customers chose banks based on proximity to their home/office, features offered etc while selecting banks. Now, banks that offer higher interest rate on savings accounts will be preferred over those that offer lesser rate of interest.

Is this Good News?

Yes & No. Of Course, this depends on whether you are the Customer or the Bank.

Yes - For the Customer:

1. Your money that is laying idle in your savings account is going to earn a much higher rate of Interest
2. You need not worry about creating a Fixed Deposit & Breaking it when you need cash. Instead you can just let it stay in your Savings account and take it whenever you wish to.

No - For the Bank:

1. If your competitor banks are offering a higher rate of interest, you too would have to do so, to attract or rather retain your customers. If ICICI Offered me 4% and HDFC Offers me 5% for the same savings account, I would rather shift my account to HDFC to take advantage of the higher interest rate they offer me.
2. Most banks will take a hit in their profit margin. Offering a higher interest rate on Savings Accounts essentially means leaner profit margins. This will affect their stock prices because, customers tend to dump stocks whose profit margins go down
3. Managing Liquidity would be an Issue. When a bank has to offer a higher interest rate, they can do so only if they lend out the money to loan customers. They cant lend all of it because they have to maintain a liquidity ratio to meet customer withdrawal demands. So, banks have to work harder now to make profits.

Are there any Side-Effects for Customers?

Of Course YES. Every coin has two sides and even this news has its downfalls. Since the bank has to offer a higher rate of interest on savings account (Due to Competition), they may pass on this burden to Loan Customers. Customers who borrow money from banks will have to bear this extra charges in order for the bank to retain its profitability.

Have Banks Revised their Rate of Interest on Savings Accounts Already?

Yes. Not many banks have done it so far, but some of the Private Banks have done so already.

1. YES Bank - 6% for all Savings Accounts
2. Indus Ind Bank - 5.5% for Savings Accounts with balance of less than 1 Lakh and 6% for Savings Accounts with balance of greater than 1 Lakh
3. Kotak Mahindra Bank - 5.5% for Savings Accounts with balance of less than 1 Lakh and 6% for Savings Accounts with balance of greater than 1 Lakh

More Banks are expected to follow suit.

Is it a Good Idea to shift banks right away?

Well, I wouldnt suggest that. We should wait for a few more months to see what rate of interest the bank we hold a Savings Account with is offering before taking the shift decision. However, if you want to open a new Savings account and have any of the higher interest paying banks near your home or office, it would be a good idea to choose them instead of the other banks.

Will Nationalized Banks offer such attractive Savings Account Interest Rates?

Well, this is something that only time can tell. Some Reasons why they may delay the rate hike or not give such an attractive Savings Account rate of interest could be:

1. In most Nationalized Banks, a bulk of the customers with Savings Accounts are "Pensioners" and "Senior Citizens". They can receive their pension only with Nationalized Banks and hence cannot shift to private banks.
2. They do not have aggressive targets to attract customers because the uncle who writes their pay-check is the Government of India and hence their policies are not usually Customer Friendly.

However, to keep their market share with the younger population who dont receive their Pension, they would eventually have to hike their rates. Otherwise, customers will move on to Private Banks that offer a much higher interest rather than being stuck with Nationalized Banks.

Happy Saving!!!