Savings account interest rates on a down trend ?

By BankBazaar | October 31, 2014

Savings Account

A popular Television advertisement of a private bank with the slogan ‘six is great than four’ may not have faded from public memory but the USP of high interest rates could well be a thing of the past. Few private banks that were attracting users with high interest rates for savings account are slowly on their way for downgrading their interest rates due to increasing operational costs and an easing liquidity scenario overall. While financial experts believe that the softening of interest rates of savings bank accounts are a fallout of the ease of money supply in the financial system overall, the reduction in interest rates is not limited to savings bank accounts alone but also fixed deposits with shorter tenure periods. Let us take a look at the recent downward trend of savings account interest rates.

Tracing the Deregulation of Saving Accounts Interest Rates:

The Reserve Bank of India migrated to an unregulated interest rate regime in October 2011 allowing banks to fix interest rates independently for both savings bank account and current accounts. Prior to the unregulated regime, the interest rates for almost all banks were similar and in the range of 4% per annum. The increasing competition in the private banking sector and the unregulated interest rate regime made it possible for some banks to offer higher interest rates to attract customers. While majority of big banks including State Bank of India, the largest public bank and private banking giants such as ICICI Bank and HDFC Bank did not announce any increase in interest rates, newer banks like Yes Bank, IndusInd Bank and Kotak Mahindra bank offered interest rats as high as 6% per annum. While usually the higher interest rates were made available for bank deposits above Rs.1 Lakh, the increasing competition meant that smaller bank accounts were also offered substantially higher interest rates than the average 4% interest rates offered by other major banks.

Falling Interest Rates and Current Economic Scenario:

The reduction of interest rate of savings bank account for both small deposits as well as deposits above the minimum threshold limit of Rs.1 Lakhs have been announced by some banks since deposit rates have outran the credit growth rate cycle. As per the latest Reserve Bank of India data released in the first week of October, overall credit in the banking system grew by 11% year on year while deposits grew by 13% in the same period. This effectively meant that offering higher interest rates on small bank accounts was draining the bank’s earnings due to heavy operational costs. In a scenario where banks were forced to reduce interest rates on fixed deposits for various short to medium tenure periods, offering higher interest rates on savings bank was unjustified. As a result banks offering higher interest rates for savings bank accounts have reduced the interest rates brining them more or less as par with majority of banks ranging between 4 to 4.5 % per annum.

This downward move was initiated by Kotak Bank and Indusind Bank, the two banks who were offering high interest rates to customers. Kotak Bank has reduced the interest rates on savings account below Rs 1 lakh by 50 basis points, making it 5%, while IndusInd Bank reduced 100 basis points to 4.5 per cent on a daily balance for below Rs 1 lakh. However, Tes Bank, which was offering 6% for deposits below 1 lakh have not made any rate reduction announcements so far.

Comparison of Savings Account Interest Rates of Popular Banks:

Let us take a look at the interest rates offered by various banks for its savings account holders.

Bank Savings Account Interest Rates Balance up to Rs 1 Lakh Savings Account Interest Rates For Balance above Rs 1 Lakhs
Yes Bank 6.0% 7.0%
IndusInd Bank 4.5% 6.0%
Kotak Mahindra Bank 4.5% 6%
State Bank of India 4.00% 4.00%
ICICI Bank 4.00% 4.00%
HDFC Bank 4.00% 4.00%

 

Is it a good idea to opt for a bank offering Higher Interest Rates on Savings Accounts?

For the common man faced with the dilemma of choosing the best bank for opening a savings or current bank account, the reduction in interest rates may appear like bad news in the short term. However considering the long term affect, the reduction in interest rates has meant that interest rates are at more realistic levels. For those confused over selecting a bank to open a new account, a higher interest rate offer should not be a selection criterion as interest rates are likely to come down in the medium term. Also banks offering higher interest rates do not offer the highly lucrative or advertised rates for all account holders but only for those who deposit funds more than a minimum threshold limit. It is essential to avoid falling into the lure of higher interest rates for the consumer and look at better investing options including fixed deposits and debt funds to offset the rising inflation rather than relying on high interest rates of savings bank account.

 

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

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