Savings Bank (SB) account interest rate cut: More Banks reduce rate
Savings Bank interest rate cut initiated by State Bank of India (SBI) has prompted other banks too to take similar step. Taking a cue from the announcement by SBI, four other major banks have announced reduction in interest rate presently being offered to Savings Bank account customers. Axis bank was the first to follow suit. Now, other three major banks HDFC Bank, Punjab National Bank and Yes Bank have also announced cut in the interest rate. The trend is likely to be followed by other banks too.
Brief History of Savings Bank account interest deregulation
The steps towards deregulation of deposit interest rates had begun in the 1980s. By 2011, banks were given freedom in deciding interest rates on domestic term deposits. At that time too interest rates on Savings Bank accounts continued to be protected with a stipulated minimum rate of 3.5%.
Vide notification, the Reserve Bank of India (Interest Rate on Deposits) Directions, 2016 dated March 3, 2016, banks were allowed to decide on the interest rate on domestic Savings Bank accounts by adhering to the following stipulation that:
Interest on resident savings deposits should be calculated on a daily product basis subject to:
i. A uniform interest rate should be set on balance up to Rupees one lakh
ii. For end of day savings balance in excess of Rupees one lakh, differential rates of interest may be provided, based on bank’s decision, without discriminating between one deposit and another of same amount even if maintained in another branch. The freedom as above was extended for rupee denominated NRE Savings Bank account balances too.
What are the present developments in Savings Bank interest rate?
Despite deregulation of interest rates on savings bank accounts in 2011, major banks preferred to continue with the interest rate of 4 percent with the aim of retaining the low cost deposit customers.
On July 31, 2017, State Bank of India announced its decision to reduce the interest rate on savings bank account from 4 percent to 3.5 percent, for accounts with balance less than Rs. 1 crore. They retained the interest rate of 4 percent for accounts with balances above Rs. 1 crore. Following the decision by SBI, four major banks too reduced rates. A comparison of interest rate on Savings Bank accounts in these banks is as shown below:
|
Bank |
Interest rate before revision – % |
Cut of amount Rs. |
Revised interest |
|
|
Interest rate below cut off |
Interest rate above cut off |
|||
|
State Bank of India |
4 |
1,00,00,000 |
3.5 % |
4% |
|
Axis Bank |
4 |
50,00,000 |
3.5% |
4% |
|
HDFC Bank |
4 |
50,00,000 |
3.5% |
4% |
|
Punjab National Bank |
4 |
50,00,000 |
3.5% |
4% |
Yes Bank has three different interest rates for three slabs depending on the balance. It has slashed rates in two slabs, but retained same rate in the third slab. The revised rates are as shown below. Old rates are mentioned in bracket.
Below Rs. 1 lakh – 5% (6%)
Rs. 1 lakh to less than Rs. 1 Cr- 6% (6%)
Rs. 1 Cr and above – 6.25% ( 6.50%).
Majority of banks are expected to follow the trend. However, Kotak Bank has announced its intention to continue with the existing rates of 5% for balances up to Rs. 1 lakh, 6% for balances between Rs. 1 lakh and Rs 5 crore and 5.5% on deposits above Rs. 5 crore.
What prompts banks to reduce Savings Bank interest rate?
The reasons attributed for reduction in interest rate are
1. The rate of inflation has come down which in effect has tilted real interest rates in favour of customers.
2. Major part of deposit came in subsequent to demonetization is remaining in accounts itself which increases interest burden
3. Dullness in credit deployment being faced by the banks prevents effective utilization of deposits with the banks. Due to this, banks had to choose between raising the Marginal Cost of Lending rate (MCLR) and reducing savings bank interest rates.
How much is the benefit for banks in reducing interest rates on Savings bank?
The reduction in interest rates on Savings Bank accounts helps banks to reduce the interest burden. We may examine the case of State Bank of India. The balance in savings bank account with SBI is approximately Rs. 9,45,000 crores. Of this, 90% of balance belongs to the category, accounts with balance less than Rs. 1 crore. The reduction of 0.5% become effective on Rs. 8,50,500. The interest saving per annum for SBI with the reduction comes to a whopping Rs. 4,250 Crore
