Deregulation of savings rate - What's in store?

As expected the recent deregulation of saving interest rates by Reserve Bank of India (RBI) has banks vying with each other to raise saving rates to become the favourite with account holders. Banks are also gearing up for the challenges posed by this move. While this was an unexpected move at least as far as timing is concerned, yet private banks have welcomed the step because it gives them yet another possible USP to work with, to attract a strong customer base. PSU banks are not keen with this move as they expect their net interest income (NII) to go down as a result of an increase in the savings rate. This also means that the savings rate will follow the policy rate changes. It will go up and down depending on RBI's monetary policy reviews.

The expectation

History teaches us that deregulation of any rates in the past has increased competition, created efficiency, and benefited the end customer. Already the lead has been taken by banks to increase their interest rates and fuel the trend. Though it's a good trend, there is expectation that banks will try innovative ways to recover the loss incurred due to high interest rates. Some of possible ways could be combining savings and checking accounts, promoting checking accounts in companies, levying charges on transactions, limiting the transactions in savings accounts, enforcing larger minimum balance required, or even levying a charge for online transfer. Currently with the focus on strengthening the customer base, changes along these lines may not happen as of now. However, it could be just a matter of time before new charges crop up in bank statements.

Where do saving interest rates stand today?

Almost all the PSU banks have currently adopted the wait and watch policy to see how this new change pans out for the banking segment. Moreover, the PSU banks have a higher proportion of saving deposits to their total deposit. This will impact their profitability by a bigger margin compared to private banks. Apart from most PSU banks, private banks with high savings deposits are also yet to increase the savings rate. However, the scenario might change soon with the rest of the banks already announcing changes in savings rate. Here is a table on savings interest rate changes since deregulation was announced.

Bank	Comment on Savings Rate	Additional Information
Kotak Mahindra Bank	Increased to 5.5% to 6%	Interest rate is 6% on deposits above 1 lakh while it is 5.5% on deposits less than 1 lakh.
State Bank of India	To be increased by upto 1.25%, thus making it 5.25%.	The decision is not yet taken. SBI will wait awhile before finalizing the rate.
Yes Bank	Increased by 200 bps thus making it 6%	Applicable to all savings
IDBI	Has hinted that it will increase the deposit rates	The bank is awaiting a move from other leading PSU banks

How should customers respond?

Customers might have the impulse to change accounts and choose the bank that offers the best savings rate. After all, a difference of 2% in interest rate can make a huge difference in long run. For example, 1 lakh deposited in a bank for a period of 10 years earning 6% interest will become 1.79 lakhs while it will just be 1.48 lakhs at 4% interest.

Despite the lucrative offer, customers should wait before changing their banks. Customers should consider three critical aspects before deciding to switch –

Though other banks are in wait and watch mode they will be forced to make a decision soon on raising savings interest rate. If they do raise the rates, they will have to match what the other banks offer otherwise they could lose out on a huge potential new customer base. Hence it is important for existing customers to wait and see how their banks respond and then decide accordingly.

One should also figure out what new charges come into place once savings rates are stabilised and include those aspects in the final decision making process.

Banks usually have good offer for people who have been banking with them for long time. The borrowing is convenient; hassles are less; and availing new services are easy. If depositors change their bank, they will have to build a new relationship all over again.

Finally

As time goes by, more and more banks will rationalize their savings account interest rates to follow the policy rates. In the end, this move by RBI will build a more efficient system for banks and a better choice for customers to bank their money.