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Take Interest In Your Interest

Be aware about what interest you're earning if bank products are your default investment vehicles…

The Reserve Bank of India has said in a draft paper that the savings account interest rate should be deregulated. This rate is currently 3.5 per cent and is the only interest rate offered by banks that is enforced across all banks.

Even though knowledgeable investors do not keep a significant proportion of their money in savings accounts, this is a useful move. Savings bank accounts are the primary savings vehicle, almost by definition, of the least well-informed class of savers. As such, the only way these people have of maximising their returns is if the Reserve Bank creates conditions that facilitate that. A few months ago, RBI had forced banks to change the method of calculating the savings bank interest on the daily average balance instead of the minimum balance. This made the calculation fair and enhanced returns for customers.

Interestingly, after the RBI’s draft on rates was released, some bankers seemed to suggest that rates may actually come down because they claim that small accounts are uneconomic at even the current levels. My guess is that the banks will end up giving different interest rates to different categories of customers. Whether that achieves the RBI’s goal remains to be seen.

Savings bank returns apart, banks products are the default ‘investment’ that a majority of Indians use, and it’s a fact that bank’s rules and regulations are not setup to maximise your returns. This means that if you are using fixed deposits as an investment vehicle—and a lot or people are—then you need to track their expiry carefully because Lapsed fixed deposits are major source of leakage of returns. The ideal would be if the RBI would fix the underlying rules, but failing that, investors need to take care of their interest themselves.