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COVID-19 has affected almost every sector, and finance has been no exception. Even the basic products and services are undergoing modifications and are being attributed to new rules. These include savings accounts and their interest rates.
Why have savings accounts been impacted?
There was a slowdown in the economy following the nationwide lockdown. The Reserve Bank of India (RBI) announced a number of measures to provide relief to the affected people. One of them was the 3-month moratorium on the payment of EMIs on term loans. Also, they cut key policy rates, viz repo rate, reverse repo rate, and the Cash Reserve Ratio (CRR).
With the reverse repo rate coming down, it was deemed that banks would find it difficult to promise the same interest rates they were offering on savings bank account balances.
Experts were of the view that a cut in small savings rates would become inevitable. Subsequently, more than thirty central banks cut their rates.
How did banks react to new measures?
Big banks in India sharply cut their savings account interest rates. This created wide gaps even among large scheduled commercial banks. Some banks reduced rates to as low as 3% and 4%. Banks like IDFC FIRST Bank kept their rates at up to 5%. Such rates were even higher than the yields on liquid funds at the time. This made such savings accounts a favourable option for parking short-term money.
Why do savings account rates vary among banks?
Some banks, especially the new ones, who want to quickly expand their customer base, offer higher savings account interest rates as their strategy. Smaller banks follow this strategy despite raising cheaper funds from the bond market. The reason? Customers coming in via this route can be subsequently sold other products such as insurance policies, credit cards, and mutual funds. This strategy has been seen in the past, especially after demonetization, when interest rates dropped across the banking system. Older and larger banks do not generally need to worry about broadening their customer base. With some changing their savings account rates, and others sticking to their original rates, what results is a significant difference in rates between banks.
How does the account balance impact interest rates?
The concept of minimum balance also matters when it comes to interest rates. Most banks offer high interest rates for a certain minimum or maximum amount of money in the account. The range is usually between ₹20,000 to ₹1 crore. Individuals accustomed to keeping a low amount of funds in their savings account would have to deposit more funds to enjoy the interest.
Why do people opt to shift their savings account?
A higher interest rate is often the motivating factor. Higher interest rates can help earn more returns on savings, without locking in money for a long time or buying risky market-linked products. This helps deal with inflation, which can erode the value of savings over time. The savings account interest rate is also tax-deductible (up to ₹10,000 per annum as per Section 80 TTA of the Income Tax Act, 1961). For senior citizens, the interest deduction is at a higher value (₹50,000). Some banks may also offer other benefits with a savings account, such as rewards points, access to airport lounges, and insurance.
Are there any risks to shifting your savings account?
Firstly, there is the risk that the bank suddenly lowers the interest rate of savings bank accounts. Unlike a fixed deposit (FD), where you lock in the rate, a change of interest rate of a savings account can happen anytime.
Usually, banks do keep high rates until a certain level of current and savings account balances is reached. This level can be best seen via the CASA (current account and savings account) ratio. It gives the ratio of such account balances to a bank’s total deposits.
The second risk is that the bank may collapse or suffer a liquidity crisis. To prevent this risk, one has to keep a watch on the bank’s non-performing asset (NPA) ratio.
Note: Governments in India are reluctant in allowing even mid-sized banks to fail, especially scheduled commercial banks. Additionally, there is a formal deposit insurance guarantee in India for amounts up to ₹5 lakhs per customer.
Should you shift your savings account?
Choose to make the best of savings accounts by focusing on getting the most out of their interest rates and other benefits. If you’re shifting accounts, analyse the other bank’s offerings well and make the best of the finances that you have invested with them. If there’s no compelling reason, avoid shifting bank accounts and save on time and energy. Focus on stability and customer service when it comes to banks, and you could build a strong financial bond with them for future needs.
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