Barely had the Reserve Bank of India’s decision to deregulate the savings rate made the TV headlines that banks began vying with each other to raise saving rates to woo account holders.
But raising rates is one part; there are many challenges to deal with. While this was an unexpected move at least as far as the timing is concerned, private banks have welcomed the step because it gives them yet another possible sales proposition to attract a strong customer base. PSU banks are not so taken up by 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.

What’s in store?

History teaches us that deregulation of any rates in the past has increased competition, created efficiency, and benefited the end customer. Though it’s a good trend, there is expectation that banks will try innovative ways to recover the losses incurred due to high interest rates. Some of possible ways could be combining savings and current accounts, promoting current 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, these changes may not happen right away. However, it could be just a matter of time before new charges crop up in bank statements.

Where do rates stand?

Almost all state-owned banks have currently adopted a wait-and-watch policy to see how this new change pans out for the banking segment. Moreover, the state-owned 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 state-owned 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.

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 raise of two per cent in interest rate can make a huge difference in long run.
For example, Rs 1 lakh deposited in a bank for a period of 10 years earning six per cent interest will become Rs 1.79 lakhs while it will just be Rs 1.48 lakh at four per cent interest.

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

* Though other banks are in a 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.

Customers ahead

As time goes by, more and more banks will rationalise 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.

(The writer is the CEO of bankbazaar.com)