Banks eye lower savings account rates

The Reserve Bank of India’s new directive asking banks to calculate interest on savings accounts balances on a daily basis instead of the current monthly basis would see banks asking the central bank to look at the option of lowering the interest paid on savings accounts balances in the coming months. Radhika Pancholi reports.

The Reserve Bank of India’s new directive asking banks to calculate interest on savings accounts balances on a daily basis instead of the current monthly basis would see banks asking the central bank to look at the option of lowering the interest paid on savings accounts balances in the coming months.

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Banks pay an interest of 3.5 per cent on monthly balances and have time till April 1, 2010 to shift to the new system of paying interest on daily balances. “There was a section that wanted them to reduce because of a reduction in the reverse repo rate (to 3.25 per cent, which is below the savings bank rate). Savings rate could get capped between 3 per cent and 3.5 per cent,” said Bapi Munshi, president, treasury, Axis Bank.

RBI Governor D Subbarao, on Tuesday said banks effectively pay a little less than 3 per cent on savings account balances, because of the manner in which the monthly balance is considered for payment of interest. A study by Banking Codes and Standards Board of India had found that savings account holders received only 2.7 per cent interest.

“Though the new directive would be good for customers, it would most definitely increase the cost of funds for banks,” said Ashish Parthasarthy, head of trading, HDFC Bank.

A higher cost of funds could also mean that banks that are working on the concept of average quarterly and half-yearly balance would look at restructuring their savings account products to accommodate the daily interest rates. However, Munshi said introduction of restructured savings account products won’t be happening any time soon.