The deregulation deal: What it means for account holders

Higher savings bank rates are good. But look at other factors like transaction costs, post-tax returns.

Within a week of the Reserve Bank of India deregulating savings bank rate, banks have begun announcing higher interest rates for their savings bank accounts (SB). YES Bank raised its rate by 200 basis points (bps) to six per cent. Both Kotak Mahindra Bank and IndusInd Bank announced 1.5-2 per cent increase in their rates on Monday.

So, account holders with deposits below Rs 1 lakh will now get 5.5 per cent and those with higher amounts will be offered six per cent. A higher rate will result in higher interest income on the cash lying in one's savings accounts. But, is this reason enough to warrant a shift to another bank offering a higher savings bank rate?
 

BEFORE YOU SWITCH TO ANOTHER BANK

• Weigh convenience against the interest on the savings bank account 
• Shifting account will stagger transactions for EMIs, utility bills, etc. 
• Check out the flexi-deposit facility offered by your current bank
• Wait until there is clarity on transaction costs 
• If account cannot be closed, opt to shift surplus cash in a bank that offers higher interest 
• Consider post-tax gains, check out investment possibilities in debt

Bankers say savings accounts are used for transactional purposes and not to earn higher income. In most cases, SB accounts are salary accounts or are linked to the customer's home loan equated monthly instalments, utility bill payments and other electronic clearance services. Closing such accounts may not be easy and will involve a lot of paperwork. So, convenience, and not just the higher savings account rate, should be considered.

"Though the high rates are expected to create a buzz, move only if, in addition to the higher rates, the bank is offering a variety of service features at no or low costs," says Arvind Hali, head, retail assets, Dhanlaxmi Bank.

But, cheap banking services may become a thing of the past. Banks are likely to recover the costs of interest payouts to saving bank depositors by levying higher transactional charges for services. They already charge customers for services like issuance of duplicate or ad hoc statements, withdrawals at branches, non-maintenance of average quarterly balance, additional cheque books and so on.

Irrespective of the amount of deposit one has, banks have been asked to offer uniform rates of interest for all SB deposits up to Rs 1 lakh. Banks are free to decide on the rates for deposit amounts over a lakh. So, such rates could vary according to slabs as decided by the banks.

"Unless your liquidity need per month is that high, having more than Rs 1 lakh lying in your SB account is an inefficient way to manage funds. Such an individual can look at shifting to another bank offering a higher rate," says a senior State Bank of India (SBI) official.

A better idea may be to shift the surplus cash into another account instead of closing, till there is more clarity on the bank's service charges. "A lot of freebies might be withdrawn later. One should wait and watch for the next two months. By then most banks will have decided on rate increase and service charges," adds the SBI official.

Soon, competition will ensure that there won't be much difference between the SB rates offered by banks. But, whether you shift or not, you could opt for the 'sweep-in, sweep-out' or a flexi-deposit facility that banks offer. Apart from the pre-decided sum in the SB account, the rest of the money gets linked to the bank's fixed deposit that earns higher interest (7.5 per cent) than what the SB account offers (5.5-6 per cent ). During withdrawals, however, any deficit sum is transferred from the 'sweep-in, sweep-out' deposit to the SB account, allowing regular transactions.

While higher SB rates are welcome, we need to remember these are pre-tax rates. So, even at six per cent, post-tax rates for those in the highest tax bracket of 30 per cent will work out to 4.2 per cent . Which is why financial planners suggest investing surplus sums in debt instruments instead of SB accounts.

"Debt products have been giving high returns based on high interest rates. Also, post-tax returns from these are either better or at par to what the pre-tax SB rates are offering. It might be a good idea to lock into these while rates are still high," says financial planner Suresh Sadagopan.

One-year fixed deposit rates are 8.25-9.25 per cent. In fact, banks offer higher rates of 10.25 per cent for senior citizens. Post tax, the returns work out to seven-eight per cent. Other debt products one could look at is PPF (eight per cent ), EPF (9.5 per cent), post office schemes (eight-nine per cent ) and debt funds (around seven-nine per cent).