More returns, but transaction costs could increase

The Half-Yearly Review of Monetary Policy has some good news for bank accountholders, the Reserve Bank of India (RBI) has decided to free savings account rates. In other words, your idle cash in a bank account could earn more interest income. But there is a caveat, banks will have to offer a uniform rate on deposits up to Rs 1 lakh. For deposits of over Rs 1 lakh, they have allowed to provide different rates.

But the good news can end there. Banks, which are paying higher deposit rate, may also charge higher cost from customers on transaction charges. “Customers will have to pay for the higher costs that the banks will have to incur on this account,” said R K Bansal, executive director, IDBI Bank.

 

So, you may have to pay more for cheque books, demand drafts and transactions over internet and mobile. Any increase in saving deposit rates, as a result, may help only those who do not transact much.

What can make things more lucrative are the additional tiers that are likely to get created. “Though RBI has created only two tiers, more tiers can be are expected to be created at the upper end,” says Shyam Srinivasan CEO & MD, Federal Bank.

This, in turn, could lead to customising of savings accounts. “The rate you are offered will depend on the amount in the account and the benefits you get on it. For example, those with over Rs 5 lakh may get a higher rate and five free transactions. And those with less than Rs 3 lakh may get a lower rate in comparison and no free transactions,” said a senior public sector banker. For those who have less than Rs 1 lakh in their savings account, this announcement may not be a significant one, said banking executives.

However, deregulation of rates does not really make the returns from savings account more attractive than returns from other debt instruments. And, so it will not really make great sense to think of it as an investment route,” said says Arnav Pandya, certified financial planner.

One-year fixed deposit rates are more attractive at 8.25 - 9.25 per cent from leading banks like SBI and ICICI Bank. Similarly, public provident fund (PPF) gives a tad lower at 8 per cent, if you can lock-in money for very long, that is, 15 years. You can withdraw half the amount every year on completion of six years. Similarly, employee provident fund (EPF) is giving 9.5 per cent. All post office saving schemes pay eight per cent, barring Senior Citizen Savings Scheme that pays nine per cent.

Debt funds are another option. At present, ultra short-term funds have returned 8.52 per cent last year, according to mutual fund tracking agency, Value Research. They are riskier than liquid funds, but returns are tax-efficient. Liquid funds have given 8.20 per cent. Short-term funds have given eight per cent, income funds 6.88 per cent. Gilt funds have given over five per cent.

Leading banks such as, SBI and HDFC Bank, may not immediately hike saving rates from the existing four per cent because of their high current account-savings account (Casa) ratio. SBI’s chairman Pratip Chaudhuri has already said so. But smaller banks like YES Bank and IDBI Bank, who need to hike their Casa, may take this route to attract more deposits. The former has already hiked savings account rates by 200 basis points to six per cent.