Savings Bank Deposit Rates Will Vary Now

by Manshu on October 25, 2011

in Fixed Deposits

The RBI deregulated the interest rate on savings bank deposits today, and this means that banks are now free to set the rate they want instead of the 4% that was fixed for all banks earlier.

The main condition that RBI has put forth is that interest rates for all account holders with less than Rs. 1 lakh will remain uniform.

I understand this to mean that the bank will have to pay me the same rate of interest regardless of whether my account has Rs. 10,000 or Rs. 1,00,000 but that interest rate can differ from one bank to the other.

So, Lakshmi Vilas Bank can decide to give its savings account holders 5% while ICICI may decide to give its account holders 4%.

Secondly, banks can create a tier structure for interest rates on balances of over Rs. 1 lakh, so they could offer 5% for balances between Rs. 1 lakh – 5 lakh, and 6% for balances over Rs. 6 lakhs and so on.

The way the interest is calculated should remain the same – that is the daily balance method that’s currently followed and banks shouldn’t get back to their gimmicky ways of taking the minimum balance in a month etc.

While this is great news, and in general I think market players should have more freedom in what they do – this also gives people an excellent way to behave penny wise and pound foolish.

You have to be cautious that you don’t spend too much time chasing an extra percent on a few thousand rupees. After all, 1% of Rs. 1 lakh is a thousand bucks and if that’s all you get extra by switching bank accounts, it will not be worth the effort at all.

If you have a lot in savings account then instead of switching – the question should be why not create a fixed deposit out of it.

Now, this is meant more as a thing to keep in mind rather than to say you should shun a higher saving rate and stick to whatever bank you have.

Most people have a salary account from their employer, and it is probably very easy to set up a second account and then do online transfers to benefit from the extra percent or two, but if that becomes too much of your focus then you will end up playing the wrong game.

I say that based on the experience of how so many people wait till the very last minute to buy the tax saving infrastructure bond knowing fully well that a new issue will earn them just half a percent or so extra and if you’re investing all of Rs. 20,000 in these bonds then that’s peanuts.

I will create a list of savings bank interest rates here when banks change their interest rates, and if you have anything else to add to this please leave a comment.

{ 14 comments… read them below or add one }

Hari October 25, 2011 at 10:32 PM

Thanks for your post Manshu.
In fact Yes Bank has already upped their interest rates to 6%, check the link below http://news.jagoinvestor.com/rules-and-regulations/get-different-interest-rates-on-saving-bank-accounts/186/
It seems their ratio of CASA to Current A/Cs is quite low at 14% or so hence they are jumping into the fray right away!

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Manshu October 25, 2011 at 11:30 PM

Wow that was quick! Although I wonder why I don’t see anything on their website even though others like Reuters and NDTV are already reporting it.

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Hari October 26, 2011 at 10:17 AM

Correction – YES Bank’s ratio of CASA to Total is quite low at 14% or so!

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Manshu October 26, 2011 at 6:54 PM

Thanks for the great info Hari!

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bemoneyaware October 29, 2011 at 7:07 PM

Interpretation of uniform rate on jagoinvestor seems to be different from what has been reported here. Quoting the website
On any deposit of less than 1 lac, there will still be a uniform interest rate by all banks which will be decided by RBI

This does not seem to be deregulation and so I think Manshu is right here.

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bemoneyaware October 29, 2011 at 7:10 PM

Regarding second point, the differential interest rate RBI has categorically said for savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest, if it so chooses, subject to the condition that banks will not discriminate in the matter of interest paid on such deposits, between one deposit and another of similar amount, accepted on the same date, at any of its offices.
It cannot differentiate between the customers on the same date for same amount

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bemoneyaware October 29, 2011 at 7:12 PM

Saving Bank Account:Do you know how interest is calculated and more as the name suggests shows how to calculate interest rate and also gives an alternative to Saving Bank Account – the liquid funds.

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Hari October 31, 2011 at 7:22 PM

Update:
IndusInd Bank and Kotak Mahindra Bank have also hiked interest rates on SB A/Cs. For balance less than 1 Lakh they are offering 5.5% and 6% p.a on balance above Rs. 1 L:akh.
Not sure if they’ll calculate average quarterly balance or they’ll use some method!

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Manshu October 31, 2011 at 8:01 PM

Wow thanks – the great race starts! I hope they don’t screw customers and calculate a fancy min balance or something.

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Hari November 1, 2011 at 11:52 PM

Interest on savings will be calculated on daily balance method as was done earlier. There is no change in the method of computing the same.

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Manshu November 2, 2011 at 4:23 AM

thanks for letting me know Hari.

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bhanu kiran January 9, 2012 at 12:10 PM

hi every one i want to invest for 30000 and i need to choose tax saving plans

Question 1: which one would be better if iam looking to invest for short period

Question2: which one would be better if iam looking to invest for long period

Note: Iam not intrested in Insurance plans.
given the highest returns iam ready to invest in higher amounts and variable period of time .
and the intrest earned should be tax free

Thanks for your suggestions.

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Mohammed Moin Sheikh January 16, 2012 at 5:22 PM

In Yes bank,the interest rate over and above 1 lac is 7% instead of 6%

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Manshu January 16, 2012 at 9:37 PM

Thanks, didn’t know that – I have a separate post for tracking the highest savings rate and have updated it there. You can see it on this page:

http://www.onemint.com/2011/10/31/highest-savings-bank-account-interest-rates-in-india/

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