RBI has made 2 important announcements in the past 10days – the recent being increasing the interest rates on Savings Account from 3.5% to 4.0%. This is definitely a good news for the a/c holders, esp. people who maintain high balances. This increase comes after almost 2 decade.
The 1st announcement was release of a discussion paper on whether to free the saving a/c interest rate. Freeing of the interest rate payable on Saving a/c means each bank can decide what interest rate it wants to pay, typically like the FD interest rates which are decided by the individual banks (though they remain in the narrow band).
So what happens if the interest rate on Savings A/c is deregulated (freed)?
1st – PSU banks expect that this will lead to Pvt. banks increasing the rates to unsustainable levels resulting in migration of a/cs from PSU banks.
2nd – It will lead to increase in the cost of funds for the banks thereby putting pressure on the interest margins.
3rd – From Depositor’s perspective, it means higher interest rate, though it is still negative in real returns it is better than before
4th – It will also lead to banks pricing different products differently and being able to attract different category of customers. Like providing a pure internet based bank a/c (like ICICI’s B2 a/c) with higher interest rates, or providing a No frills a/c with no cheque book but higher interest rates. These will help in bring more customers.
Today the banks are not able to offer this kind of incentive to the customer and may be losing out in gaining customers and balance.
Possibly higher SB A/c interest rates will also result is some customers maintaining higher balances in SB A/c and not opening FD, which in turn will be good for the bank’s margins.
Read RBI’s discussion paper in this link and send your comments (either by commenting on this post or directly to RBI)