Saturday, October 29, 2011

Bank Saving Deposit rates deregulated by RBI

RBI has deregulated savings bank deposit rate from 25 October, 2011. This means that banks are free to determine their savings bank deposit interest rate, subject to the following two conditions:
  • Each bank will have to offer a uniform interest rate on savings bank deposits up to Rs.1 lakh, irrespective of the amount in the account within this limit.
  • For savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest, if it so chooses, subject to the condition that banks will not discriminate in the matter of interest paid on such deposits, between one deposit and another of similar amount, accepted on the same date, at any of its offices. 
Prior to this policy, the savings bank deposit interest rate was fixed at 4% for all banks. The method of interest calculation remains same – that is the daily balance method that’s currently followed and banks cannot get back to their gimmicky ways of taking the minimum balance in a month.

So now, banks will be competing among each other to offer attractive savings bank deposit interest rates. Yes Bank has already taken the initiative and announced a uniform 6% savings deposit interest rate. Other banks are still contemplating the next move after this policy change but may not be as aggressive as Yes Bank.

Other banks are likely to create a tier structure for interest rates, so they could offer (lets say for example) 4% for balances up to Rs 1 lakh, 5% for balances between Rs. 1 lakh – 5 lakh, and 6% for balances over Rs. 5 lakhs and so on.

The above revised Guidelines would be applicable to savings bank deposits of resident Indians only. Interest rate on Non-Resident (External) Accounts Scheme and Ordinary Non-Resident Deposit under savings account, which has been prescribed at 4 per cent per annum at present, will continue to be regulated until further review.

This move by RBI will be good for customers as they will get more interest on their savings. Also, it may put pressure on the short term fixed deposit rates. If a customer closes his or her fixed deposit prematurely, there is a penalty involved and the interest rate is applicable of the premature duration. So, a customer may choose to put his money in savings account rather than a short term fixed deposit as it gives more flexibility and still offers a good interest rate. For more than 1 year tenure, a customer may still prefer fixed deposit because the interest rate is almost 350 basis point higher.


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