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.