Savings Bank Account – Changing Colours

Last week the Reserve Bank of India deregulated the interest rate payable by commercial banks in India.  Till then all the banks were paying same interest rate on the balance held by the deposit holder in the SB account.  The interest payable on Fixed Deposits (FD) was deregulated few years ago.  During the last one year, two important changes were made by RBI as far as SB accounts are concerned.  The interest payable was earlier calculated by banks on the lowest balance standing in the credit of an account between 10^th and 31^st of a month.  Few months back, the RBI instructed the banks to do away with this practice and calculate interest based on daily balance.  This resulted in marginal increase in the interest received by deposit holders in the SB account.  The second major step was deregulation of interest rates on SB accounts.

With deregulation, we are about to see different banks offering different interest rates on SB accounts.  In fact, this has already started with some banks announcing revised rates with effect from 1^st Nov.  From the bank’s point of view, this has large implications.  Money parked in SB account is highly volatile, unlike the amount locked up in FD.  This amount can be withdrawn by the customer anytime, and hence is not available for the bank for long/medium term lending.  This may create asset-liability mismatch.  In order to bring in some certainty in the balance available, some banks have announced a differential interest rate structure with higher rate of interest for balances above certain level (say Rs.1 lakh) in SB account.  I would also expect some banks to increase the minimum balance requirements in the SB account.  So we can look forward to innovative SB account products rolling out of banks in India to lure the customers.  However, form the customer’s point of view, this move makes only a marginal difference as the rate differences between banks is not going to be very high, and unlike other investments, people are not keen on shifting their SB account from one bank to another for the sake of additional 0.5% or 0.25% interest.  There are many other factors like the convenience, quality of service, net banking, payment services etc. that keep a customer with a bank, even if it pays few basis points less interest on SB.  After all we don’t park our money in SB account as an Investment!