With Diwali came the good news that the RBI has deregulated the savings bank (SB) interest rate and that we could now earn more on the money lying in our SB accounts.

So far, it is quite possible that we have seen the SB account as a convenient platform to carry out banking operations and nothing more.

Firecrackers done with and sweets digested, let's use this Sunday morning to find out how this regulatory change will alter the way we approach our SB account.

With deregulation, banks are free to fix the interest rates on SB accounts.

For the first time, this gives us a choice to zero in on the banks that give better rates, rather than opening an account in a branch situated next door or continuing with our current bank.

For banks, on the other hand, it means that customers could switch anytime.

So, their transaction costs and service quality need to be superior to retain customers.

Now that YES Bank has raised the SB interest rates to 6 per cent, are you already tempted to switch banks?

You may well wait and watch as there may be many others who could follow.

All said and done, mobilising funds through opening of current and savings account (CASA) today is still cheaper from a bank's point of view, than through other means such as fixed deposits.

YES Bank's CASA ratio (as a percentage of total deposits) is presently around just 10.9 per cent as against 30-50 per cent maintained by most public sector banks.

Others with low CASA ratios — and hence the most probable candidates for savings rate hikes in the near term — include Kotak Mahindra Bank, IndusInd Bank and IDBI Bank. Fresh bank licences will bring new banks into the system soon, and they may go all out to woo customers.

Investment vehicle

Some investment advice heeded and obligations met, we still have a tendency to keep quite a lot funds in our SB account.

After all, isn't the thought that we have enough liquid cash to meet emergency needs comforting?

But at times, when inflation is constantly hovering around the double-digit mark, the surplus funds idling in the SB account would earn a meagre 4 per cent return, giving us negative returns in reality.

For some of us, this may still be acceptable as we don't see the SB account as an investment.

The savvier among us would perhaps start a recurring deposit, and earn higher interest on at least that portion of the money.

The still-smarter would enable sweep facility in their accounts wherein surplus can be swept into fixed deposits to earn higher interest and swept back to the SB account when funds are needed.

But not all accounts in all banks have this sweep facility; not many are aware of it and still less avail it.

The deregulation now gives an equal chance for all customers to look at a savings account as an investment vehicle.

Part of the RBI announcement was that for deposits over Rs 1 lakh, banks may provide differential rates of interest (higher than the normal SB interest), without discriminating one customer from another. Customers in urban and metropolitan areas, who are usually considered to have such high bank balances, can now enjoy rates on their SB account possibly as competitive as fixed deposits.

Banks may also create products to capture these large-ticket customers as they treat a good portion of SB account balances as ‘core deposits'.

This means, together with term deposits, banks use these SB accounts to increase their exposure to long-term loans. For us, customers, the new regime would require us to actively manage our savings, so that we do not lose the benefit of higher rates. The SB interest deregulation is also expected to have a positive effect on short-term deposit rates.

Short-term rates

Today, with SB rate fixed at 4 per cent, banks offer rates from 3.5 per cent to 8.75 per cent for 15-90 days fixed deposits.

A higher SB rate could prompt banks to keep rates on short-term deposits higher, especially when there is a liquidity crunch.

Public sector banks with robust branch network and high CASA ratios may still resort to raising SB interest when demand for credit is high.

Being a trade-off between a bank's cost of raising funds and the need for the same, this would create stiff competition among banks implying that the customer would get the best deals.

The pinch of salt

Well, with the deregulation, banks' cost of obtaining funds would go up, making a dent in their profitability. While high competition could be a deterrent, some pass-through may happen, pushing up borrowing costs for customers.

Besides, just as how SB rates can be revised upwards, the fact that they may be revised downwards must also be remembered.

Pensioners and small savers who use it as their primary savings instrument may thus find it difficult.

The maintenance of savings bank deposit accounts entails transaction costs for banks.

With banks looking to increase operational efficiency, a higher interest on SB accounts could result in banks cutting down on, or charging for, some free services provided to all SB accounts, including no-frill accounts.

Banks may also charge differently based on which channel the customer uses for transactions — branch, Internet, ATM, mobile and so on (branch banking is considered the most expensive) — or vary charges and services based on whether one is an over-Rs-1-lakh customer or not.

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