Expert advice

Nov 01, 2011,13.57 IST

Advantage Customer!

By Suresh Sadagopan

RBI has done it at last… freeing up the interest rates on Savings accounts and allowing the market to determine the rates.  This is a very welcome move. Also, this corrects a historical wrong.

If RBI ( which is an entity with zero risk ) borrows at 7.5% currently, it stands to reason that other  banks ( which carry more risk than investing with RBI ) should pay a premium to that, while borrowing from customers. Hence, Savings bank rate should actually be higher than the reverse repo rates.

But bank SB customers were getting 3.5%pa as interest all these years and it became 4% pa very recently.  Current account holders were and are still getting nil returns, which again is unfair as the banks get to use the money and it is essentially free money for them. They are firing from someone else’s shoulder!

Now RBI has corrected the anomaly, at least regarding savings account interest rates. It has allowed the banks to offer a standard  interest rate till Rs.1 Lakh in the Savings account and a differential rates above Rs.1 Lakh, for various slabs, as determined by the bank. Some banks, who have huge amount of CASA ( Current account Savings Accounts ) deposits are crying hoarse that this will impact their profitability and hence they may have to charge higher rates for loans.

What they are crying about actually is about loss of easy money, which was a low hanging fruit for them. They justify the low rates saying that they give various services. These days every service is charged – be it a cheque book, a signature verification etc. So, that rings hollow.

Now, competitive pressures will ensure that the interest rates for Savings accounts will go up. Yes Bank has already announced 6% interest in their SB account. This is probably the shape of things to come. Some of the banks may not increase it to that level, but will still have to take it up, if they want to ensure that money stays in Savings Bank accounts. Even 6% they are paying is very low. As seen earlier, it is much lower than the interest RBI pays banks! So, banks have no reason to complain.

A specious logic I have seen in the paper says that the higher interest rate in savings account will result in a small increase in the interest rate, amounting to just hundreds of rupees. But that is the money which belongs to the customers – so it does not matter if it is hundreds of rupees or it is less than Rs.10. My experience with my clients shows that people do have substantial sums of money in their savings accounts. For them, the difference will be in thousands of rupees, not just loose change.

Now the moot point – do you need to change your bank, if your bank is unwilling to hike the interest rates. It appears that banks will not have too many options in a competitive landscape. It is debatable whether they will go all the way to 6%. But 5% seems very much possible. 

Once many banks first come to this level, the ones who are sitting on the fence will have no other option but to follow suit. So, you are bound to benefit in any case and there is no need to change banks for now.

But if your banks is playing truant, you could always close the account itself, if it suits you and open with a more customer friendly bank… or you could simply open a new account in the customer friendly bank and keep most of the deposits in it. The main point is that banks can no longer take you, their customer, for a ride.

The author is a Principal Financial Planner at Ladder7 Financial Advisories.

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