Sunday, November 6, 2011

Savings Bank Interest Rate Deregulation

Last week, the full page advertisement of Kotak Mahindra Bank in the front page of The Times of India would have caught the attention of many of us. RBI, in a key move, deregulated the savings bank interest rate. Simple speaking, the bank can offer a rate of their choice for the savings account. Previously, the rate was fixed at 4% i.e. all the banks offered a uniform rate of 4%.

Yes Bank and Kotak Mahindra Bank have fired the first salvo by offering an interest rate of 6%. Other banks might follow.

So, the question is, should you transfer your account to a bank offering a higher interest rate?

First, let's do a simple calculation. For the sake of simplicity, suppose you have 1 Lac in your savings account throughout the year. So, at 4%, you would be getting an interest of Rs 4000, while at 6% you would be getting an interest of Rs 6000. So, the difference is Rs 2000. That's the gain that you make by shifting the account. Any loss then? Nothing monetary, but you might think of the following hassles:

If your primary savings account is a few years old then there are a lot of things associated with it:
(a) You salary gets deposited to it every month: You will have to inform your employer to make the deposit in the new account. Now, your employee might not have a direct dealing with your new bank. So that's a problem.
(b) Your ECS payments for loans and bills would be liked with your primary account. Home Loan, Car Loan, Mobile Bill, Electricity Bill, Landline Bill, Credit Card Bill and what not. So you will have to run around a bit to get all these shifted and linked again to your new account. Not a difficult task but quite a time consuming one!
(c) If your demat account is linked with your primary account, then you need to check whether your demat account provider has a linkup with the bank where your new account will be. If yes, that's good. If no, then you would need to maintain both the savings accounts or close your demat account and open a new demat account associated with your new savings account - Don't even think about this - Shifting a demat account is a very time consuming and is a big headache!
(d) Moreover, you are accustomed to your old bank and making a change is never easy - no matter how good the facilities are. You have to learn and get used to new things.
(e) If you have some post dated cheques issued, then you would have to cancel them or maintain money in your old account to service those cheques. That means maintaining one addition account - again remembering some more things and tracking them!!
(f) Getting a personal loan or a new credit card from your old bank would be much easier than getting one from the new bank. Though banks these days go by your credit score, but a few years financial record (hopefully good and not bad!!) with the bank always helps

So, if it seems that changing the account would not be useful enough, what can you do to derive more from your present account? Go for a sweep in/sweep out facility. Most of the banks provide these. So, when your money in the savings account crosses a particular limit, that excess money is transferred to kind of a fixed deposit. But the advantage is that this kind of a fixed deposit is that you can withdraw that money any time. So not only are you making more (by way of interest) from the excess cash but you also have the liquidity in case of an emergency. See advantages of a Sweep-In facility here.

Think about all these before making your choice!

I believe we would hear a lot more regarding this deregulation. Things are just hotting up. Some say that customers with more money in their account (say more than 1 Lac) could be offered a higher interest rate. Others even say that there could be a downward revision of rates - though that seems to be unlikely. Many say that banks with a large pie of funds in their savings deposits might not do any change at all. So, let's wait and watch! 


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  2. Thanks for the shout out! Great tips and it's fun to see all my blogger friends growing financially.
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