Banks are lowering Interest Rates on Savings Accounts: What should you do?

Most public sector as well as private sector banks have started reducing the interest rates offered on their range of savings accounts. The rate cut followed by other banks was initiated by the State Bank of India and it got impetus after the Reserve Bank of India reduced the repo rate.  Let us have an analysis on the rate cuts and what people should do in this situation to earn higher rate of interest on their savings.

Reasons for the lowering of interest rates

There are a number of reasons why banks have reduced their interest rates. Some of those are as follows:

• Repo Rate Cut– RBI has slashed the repo rate from 6.25% to 6% on cues of low inflation. This has enabled banks to get funds from RBI at lower interest rates. Thus they have also reduced the interest rates on savings accounts and fixed deposits for its customers.
• Low Demand due to Demonetization– Thanks to the demonetization of higher currency notes in November 2016, banks saw a huge volume of cash deposits which have left them in cash surplus and thus there is low demand of cash in the banking market. It is also one of the primary reasons why rates are being reduced by banks.
• Low Inflation– Inflation has touched record low levels which in turn has stabilised the financial market. This has enabled banks to reduce interest rates on savings accounts.

Banks that have lowered interest rates on Savings Accounts

The biggest bank of the country, State Bank of India, lowered its rate of interest offered on savings account by 50 basis points to 3.5% for deposits less than Rs. 1 Crore. However, the rate of 4% was not altered for deposits above Rs. 1 Crore.
Similarly, banks such as Axis Bank, HDFC, Bank of Baroda and Indian Bank slashed the interest rate offered on savings accounts having deposits below Rs. 50 Lakh by 50 basis points to 3.5%.

Karnataka Bank now offers 3% interest rate on savings accounts that have deposits up to Rs 1 Lakh. Accounts having deposits between Rs 1 Lakh to Rs 50. Lakh provide 3.5% interest rate whereas the rate of interest was left unchanged for those accounts that had deposits above Rs. 50 Lakh.
Yes Bank offered 6% interest rate on savings account. Account holders having less than Rs. 1 lakh in their savings account will now get interests at a rate of 5% whereas the rate of interest offered on accounts having deposits above Rs. 1 lakh would be 6%.

What should customers do?

As most big banks have reduced the interest rate on savings accounts, it is advisable for customers to look for alternatives that will help them in managing their savings and earning relatively higher interests. In such a scenario, digital payments banks and small banks can offer better opportunities to depositors.

• Small Banks offering higher interest rates

Instead of earning low interests on their savings, people should opt for smaller or private banks that offer higher interest rates. These banks offer the interest rate of up to 7% on deposits made in the savings account.

DBS offers 3.5% interest rate on accounts having balance below Rs. 1 Lakh. For accounts having balance ranging from Rs. 1 Lakh to Rs. 2 Lakh, the bank offers 6% interest rate and 4% on accounts having balance above Rs. 2 Lakh.
RBL Bank offers a maximum of 6.75% interest rate on savings accounts having deposits above Rs. 1 Crore. Bandhan Bank offers 6% interest rate on all accounts having balance above Rs. 1 Lakh.
Kotak Mahindra Bank offers an interest rate of 6% on savings accounts having balance between Rs. 1 Lakh to Rs. 5 Crore. IndusInd Bank offers 6% interest rate on accounts having balance above Rs. 1 Crore. Lakshmi Vilas Bank offers an interest rate of 6.5% on savings accounts that have the balance above Rs. 10 Crore.

• Payments Banks

Currently, there are three Payments Banks in operation in India – Airtel, India Post and Paytm Payments Bank. RBI has granted license to other institutions as well. These are Jio Payments Bank, FINO Payments Bank and NSDL Payments Bank. But they are yet to start operations as of now.

Airtel offers a maximum of 7.25% interest rate on deposits made in the savings account. Airtel also offers personal accidental insurance of Rs. 1 Lakh on all savings accounts. Money transfer from one Airtel savings account to another is also free.
India Post Payments Bank offers 4.5% interest rate on savings accounts having deposits up to Rs. 25,000 whereas the rate offered on accounts having balance between Rs. 25,000 to Rs. 50,000 is 5% and account holders get 5.5% interest rate on savings accounts having deposits ranging from Rs. 50,000 to Rs. 1 Lakh.

Paytm offers the lowest interest rate of 4% among Payments Banks on savings accounts. However, it offers tempting cashback offers on deposits made in the Paytm savings account.