Maximise your savings account

The savings bank interest rates have become more attractive because in the last couple of months, fixed deposit interest rates have dropped significantly

 

Vivina Vishwanathan

Hemant Mishra/Mint

With the launch of differentiated banks in India, the interest rates on savings account deposits in some of the banks have been priced aggressively, even in a lower interest rate cycle. “Small finance banks, payments banks and newly started private sector banks such as IDFC Bank Ltd and Bandhan Bank Ltd are offering higher saving account rates,” said Parag Jariwala, vice-president, institutional research, banking and financial services, Religare Capital Markets Ltd, in a note.

These rates have become more attractive because in the last couple of months, fixed deposit (FD) interest rates have dropped significantly—in some cases even lower than the small savings rates.

In such a situation, you may feel tempted to open accounts in banks that offer higher rates. Here is a look at what you should check before opening a savings account that offers higher interest rates.

Higher interest

Small finance banks: On 23 January, the Reserve Bank of India (RBI) said that two small finance banks—Utkarsh Small Finance Bank Ltd and Suryoday Small Finance Bank Ltd—have started operations.

Utkarsh Small Finance Bank commenced operations with five branches across Varanasi, Patna, Delhi-NCR and Nagpur. In a press release, Utkarsh Bank said that it will offer interest rates that are 1-1.25% higher than other banks. According to the website of Navi Mumbai-based Suryoday Bank, the lender will offer 6.25% interest on deposits of up to Rs1 lakh, 7.25% on deposits of Rs1-10 lakh and 7% on deposits above Rs10 lakh.

Payments banks: Early this month, Airtel Payments Bank Ltd launched its pan-India operations and it is offering an interest rate of 7.25% on savings account deposits. A payments bank is a differentiated bank that allows customers to open only a savings account, that too with a deposit of up to Rs1 lakh. Though the interest rates offered here are among the highest in the industry, they have cash withdrawal charges that will end up reducing the overall interest you earn on the deposit.

Universal banks: Large commercial banks such as State Bank of India and ICICI Bank Ltd continue to offer interest rate of 4% per annum on savings accounts. However, mid-sized banks and small banks are offering over 4%, depending on the amount you leave in your bank account.

For instance, IndusInd Bank Ltd, Yes Bank Ltd, Kotak Mahindra Bank Ltd, Bandhan Bank Ltd and RBL Bank Ltd offer 4.25-7.10% interest rates on savings account deposits.

Click here for enlarge

What to do

After the RBI deregulated savings rates, banks—especially the newer ones—started offering higher interest rate to attract depositors and build market share. Let’s see what a difference of 1-3% means for your deposits?

Say, you leave Rs10,000 in your savings account for a year. If the interest offered is 7.25% per annum, you will earn Rs1.98 per day as interest assuming you leave the balance untouched—compared with Rs1.09 per day with a bank that gives you a 4% interest rate. Remember that interest rates are only one part of your savings account. “Other crucial factors include channels of transaction, service, access points, fees and charges. You also need to look at specific requirements such as minimum balance requirement,” said Naveen Kukreja, co-founder and chief executive officer, Paisabazaar.com.

For instance, if you open a Savings Ujjwal account with Suryoday Bank, you need to keep an average monthly balance of Rs2,000. If this balance is not maintained, you will be charged 5-10% of the shortfall amount, with a maximum cap of Rs150.

Since there are differentiated banks now, you also need to factor in various limitations of specific banks. For instance, in payments bank savings account you can’t deposit more than Rs1 lakh.

Vivina Vishwanathan

Source : livemint