Savings Bank Deposit Rates Will Vary Now

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.

16 thoughts on “Savings Bank Deposit Rates Will Vary Now”

  1. 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.

  2. 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!

      1. 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.

  3. 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

    1. 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.

    2. 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.

Leave a Reply

Your email address will not be published. Required fields are marked *