The Reserve Bank of India (RBI), in its second quarter monetary policy review, has deregulated savings bank rates with immediate effect. As a result, many commercial banks, such as Yes Bank, Kotak Mahindra and IndusInd Bank, have announced an increase in the savings banks interest rate to 5.5% per annum for balances below R1 lakh and a higher rate (up to 6.5% p.a) for balances above R1 lakh. The largest banks, PSU and private, have been mum so far.
It is pertinent to note the fine print: RBI states that banks will have to offer a uniform interest rate on deposits of up to R1 lakh. For savings deposits above this amount, they are free to offer differential interest rates. The move will have an impact on a host of aspects.
High yield on debt
With interest rates peaking, debt instruments are becoming increasingly attractive and with the recent jitters in the equity market, there is a paradigm shift in the way debt is perceived by investors. Balances in the savings bank account are generally viewed as idle cash, but, now, that is going to change. More importantly, a lot of money that is floating idly because of being held as cash in hand, could make its way into banks and have a multiplier effect on the economy itself.
Short-term interest rates
A direct impact of the deregulation of savings bank rates will be on short-term deposits. T-bills and Call money are some of the short-term money market instruments likely to benefit substantially. As a spin-off, liquid/liquid-plus mutual funds are also likely to do well within the debt MF category. Corporates often use liquid plus funds to park their excess liquidity, for durations ranging from three days to 1- 3 months. Now, given that the amount so parked is generally a larger sum, the gains could be substantial. For an individual with a small deposit, the gain from the de-regulation and higher interest rates would be negligible.
Higher cost for banks
The deregulation of savings bank deposit interest rates is expected to put additional cost pressures on banks and, thereby, impact their profitability. Analysts believe banks are likely to offset the impact of this increase in interest costs, partially by levying transaction and service charges on bank accounts. As per the fine print of the policy, product innovations in India after deregulation can include a variety of operations, such as branches, web-based channels and ATMs. The rates offered may differ, based on the flexibility of operation of savings bank accounts and the degree of liquidity offered, such as the notice period for withdrawal, number of deposits and/or withdrawals allowed per month, and the percentage of amount that can be withdrawn in a month, among others. Also, banks may pass on some of this additional cost to their loan products; however, with a slew of rate increases, loans have already become expensive.
Expansion of deposit base
Some banks have already increased the interest rate substantially; the key objective is to increase the deposit base. The banks with high deposit base are more likely to retain the earlier rates and may not increase interest rates now.
Switching your account
Savings account is typically used for emergency funds and one should not hold more than 2-3 months of household expenses in the account. The rest of the funds should be deployed into avenues that are likely to yield superior returns, the new higher interest rates on savings accounts not withstanding. The likely financial gain being negligible, it does not make a lot of sense to shift savings accounts just on account of higher interest rates.
Further, by opening too many bank accounts, manageability becomes an issue. Most of us use savings bank deposits for loan repayment, utility bill payments, and even investments, such as monthly SIPs. If you have had a long relationship with your bank, changing your account can be cumbersome as it also means updating all other accounts and payments linked to your account.
There are banks that offer certain value added services that cannot be ignored. Hence, it becomes pertinent to consider this aspect too before you jump the gun! However, for someone who holds large savings bank balances, this is definitely an option to consider.
n The writer is chief executive officer of Right Horizons