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Interest On Savings Bank Accounts To Be Cut?

    IndianMoney.com Research Team | Wednesday, February 08,2017, 07:00 PM
 

The Government scrapped 500 and 1,000 rupee notes on November 8th 2016. Citizens rushed to deposit their old 500 and 1,000 rupee notes at banks, within the deadline of December 30th 2016. Banks are now flush with money and are ready to lend…Big Time….

After demonetization, banks have cut interest rates on loans particularly home loans, which are the darling of the masses. Now, you and other citizens can get home loans at low interest rates and buy your dream home and also save taxes. Banks have a lot of money with them, most of this money collected from low cost savings deposits and current account deposits. Most banks offer you an interest of 4% a year on savings bank accounts. With banks raising deposits from you and other citizens at very low interest rates, banks have already cut home loan interest rates and could reduce them even further.

This is great news if you want to avail a home loan or any other loan. Not so great news for your money in the savings bank accounts. Banks could cut interest rates on savings bank accounts for the first time ever. Want to know more on loans and bank accounts? Just leave a missed call on IndianMoney.com financial education helpline 02261816111 or just post a request on IndianMoney.com website. IndianMoney.com offers Free, Unbiased and on-call financial advice on Insurance, Mutual Funds, Real Estate, Loans, Bank Accounts and Capital markets.

What is a savings bank account?

A savings bank account is a very basic banking product. You and crores of our citizens keep the money you save, in a savings bank account. Most banks pay interest of 4% a year, on savings bank accounts. Some banks pay 5-6% a year, on your savings bank account.

The Government wants every household in the country, to have access to a basic savings bank account. The Prime Minister Narenda Modi, started an ambitious scheme called Pradhan Mantri Jan Dhan Yojana (PMJDY), launched on August 28th 2014. This is essentially a zero balance savings bank account. You get a RuPay debit card with a PMJDY account, which has an inbuilt accident insurance cover of INR 1 Lakh. More than 27 Crore PMJDY accounts have been opened so far.

Will interest on savings bank accounts be cut?

Before you get an answer to this question, you must answer another question. How do banks make money? Simple…You deposit money in a savings bank account or a fixed deposit. The bank pays you interest on your deposit. The bank lends this money (gives loans) and collects a higher interest than it pays on deposits, making a profit.

Banks would love to get most of their deposits from current accounts and savings bank accounts, rather than fixed deposits, where they have to pay a higher interest. In banking language, low cost deposits are called CASA (Current account savings account). Banks pay 0% interest on current accounts and 4% on savings bank accounts.

Banks protect their CASA (Low cost deposits), to ensure a continuous supply of low cost funds (cheap money). Most banks offer an interest of 4% a year on savings bank accounts. Some banks offer 5-6% a year on savings bank accounts and try to grab low cost deposits of other banks. What do you learn from this? Banks will never cut interest on savings bank accounts below 4%.

After demonetization will banks cut interest rates on savings bank accounts?

It was decided way back in October 2011, by the then RBI Governor D Subbarao, to allow banks to decide interest rates offered on savings bank accounts (Deregulate savings deposit rates). Small banks actually offered higher interest on savings bank accounts, to grab the share of larger banks. The big banks continued to offer 4% interest a year. No bank cut interest rates below 4%.

Today, after demonetization, the situation is very different. Banks have a lot of money, most of it raised from low cost deposits (CASA), as citizens deposited old 500 and 1000 rupee notes in banks. You also cannot withdraw more than INR 24,000 a week, from your bank account. Many top bankers believe that even after these cash withdrawal restrictions are removed, about 30% to 40% of the money, will remain in savings bank accounts.

Banks will still have a lot of money to lend and could even consider cutting interest rates on savings bank accounts. This is something banks have Never dared to do in their history. Banks could cut interest rates offered on savings bank accounts to 3.5% a year.

After demonetization, banks want to increase their profits, as their loan business is still to pick up in a big way. What better way than cutting interest rates offered on savings bank accounts? However, the cut might not be too high. Be Wise, Get Rich.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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