Banks that have not linked their rates to an external benchmark can exercise discretion in the matter of when they choose to pass on RBI’s rate changes. In the past, banks have been accused of being quick to transmit rate hikes to loan rates and slow to pass them to deposit rates in a rising rate scenario, and vice versa.
Smaller depositors have been kept insulated from this change. “The thinking perhaps is that drastic fluctuations in interest rates may not be right for them,” says Amit Tewary, chief operating officer, Loantap Financial Technologies.
On the flip side, linkage to an external benchmark will mean that both the savings account rate and the overdraft rate could become more volatile. In the past, these rates remained constant for long periods. “Initially, rapid changes to these rates may prove hard for investors to digest. The monetary and credit policy is announced every two months, so it is quite possible that these rates could change several times in a year,” says Pandya.
Experts are of the view that while this is a step in the right direction, it is not enough. “At least shorter- and medium-term loans such as personal and auto loans should also have been linked to an external benchmark,” says Tewary.
The introduction of this change will mean lower rates for SBI customers holding high balances in their savings accounts. “Prior to this change, savings account holders were earning an interest rate of 3.5 per cent per annum on deposits of up to Rs 1 crore and 4 per cent per annum on deposits above Rs 1 crore, as against 3.25 per cent after the change,” says Sahil Arora, head of payment products, Paisabazaar.com. Currently there are banks that offer 6 per cent on balance above Rs 1 lakh (see table). One bank, IDBI First, even offers 7 per cent. “If you keep a high balance in your savings account, it may make sense to shift to a bank that gives you a higher rate of return,” suggests Pandya. Ideally, though, you should keep not more than one or two months of expenses in your savings account. Keep factors like convenience (proximity of bank branch) and service quality in mind when making this change.
Excess money lying in the savings account may be shifted to a fixed deposit (FD) provided the rates offered are better. “If you are not sure about your investment horizon, go for a sweep type of FD account,” says Pandya. In a normal FD, the interest paid is reduced by 100 basis points on premature withdrawal.
Another option is to invest in debt funds, though you must have the necessary risk appetite to do so, given their current troubles with defaults and downgrades of bonds. “Debt funds offer superior redemption features. Shorter duration funds do not charge an exit load,” says Arora. He adds that liquid funds are ideal if your investment horizon is up to three months, ultra-short and low duration funds are ideal for a horizon of 3-12 months, and short-duration funds are for one-three years. A recently created category called overnight funds, which invests in money markets, is even safer than liquid funds.
On the CC/OD front, SBI’s minimum rate will be 8.5 per cent, to which it will add a premium. The premium could be determined based on your past behaviour, credit score and a host of other factors. “This more transparent rate setting mechanism for the CC/OD facility is a positive for business men,” says Tewary. He expects many businessmen to shift to SBI’s facility. Further regulatory push, and businessmen adopting SBI’s facility in a big way, he says, could also lead to more banks opting for an external benchmark.
One alternative to using the overdraft facility is to use a credit card. If you use a credit card, you must be sure of being able to pay back the amount on a specific date, or else you could be charged a high rate of interest. With an overdraft facility, the rate of interest is lower, and you are charged only on the amount you have borrowed and for the period you have borrowed. There is no fixed date of repayment, so you can pay back as and when you get some money.
Investors will need to be more aware in the new regime, where rates could change rapidly. If they are not, they could be earning a lower rate on the balance in their savings account, or paying a higher rate of interest on their CC/OD facility than they thought. Finally, do not leave excess money lying in the savings account, or borrow more than is strictly needed from the CC/OD facility.