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Why Banks Are Cutting Interest Rates On Savings Account Deposits

Credit rating firm India Ratings believes that the beginning of reduction in savings bank rates by commercial banks will spur a new competition among them.

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Why Banks Are Cutting Interest Rates On Savings Account Deposits

Many banks, including SBI, have cut savings bank deposit rate recently.

SBI or State Bank of India, the country's largest lender, on July 31, 2017 introduced a new two-tier savings account interest rate system, reducing interest rates for most of its depositors. On balances below Rs. 1 crore, SBI lowered the interest rate to 3.5 per cent from 4 per cent. On balances above Rs. 1 crore, it continued to offer the rate of 4 per cent. After SBI's move, many lenders including Axis Bank, Bank of Baroda and Indian Bank cut their interest rates on savings accounts. In 2011, the Reserve Bank of India (RBI) had freed savings bank deposit rates. Credit rating firm India Ratings believes that the beginning of reduction in savings bank rates by commercial banks will spur a new competition among them.

5 Things To Know About Interest Rate Cut On Savings Bank Account:

1) "The decline in the rate of inflation and high real interest rates are the primary considerations warranting a revision in the rate of interest on savings bank deposits," SBI had said in a statement. Real interest rate refers to interest rate an investor receives after adjusting for inflation.
2) Further, SBI had said that it cut the MCLR (marginal cost of funds-based lending rate), or its key lending rate, by 90 basis points effective January 1, 2017, on the strength of large inflows in savings and current accounts after demonetisation.

3) But there has been signification outflow of CASA (current account and savings account) deposits or low-cost deposits since then, SBI said. The revision in savings bank rate would enable the bank to maintain MCLR at the existing rate, benefitting a large segment of retail borrowers in SME, agriculture and affordable housing segments, the bank said.

4) India Ratings believes that with the interest rate cycle reaching the bottom, downward repricing of existing liabilities (savings account rate cut) could facilitate a further reduction in rates. "The profitability levels of Indian banks remain weak owing to the continued pressure on asset quality and low credit demand. It would be imperative for banks with adequate capitalisation to start gaining market share over weaker peers which are starved for capital," the agency said.

5) Financial planners say that keeping a large sum of money in savings accounts is not a good strategy. Liquid mutual funds could be an alternative investors need to look at. With banks even cutting fixed deposit rates, accrual debt funds could also be considered, they say. Accrual funds mainly focus on earning interest income from the coupon or interest offered by bonds.

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