The NR EYE: Banks innovate as RBI deregulates deposit rates

Non-resident Indians (NRIs), particularly those with families back home, have some more reasons now to remit more money. The latest one was given by India’s central bank, the Reserve Bank of India (RBI), when it freed the interest rates that banks could offer their clients on savings accounts. In an earlier move, the apex bank had hiked interest levels to make even the non-resident bank accounts more lucrative. On their own too, several public and private sector banks in India have been innovating beneficial products and schemes for overseas clients. In a move late last month, RBI threw out the last vestige of the regulated interest rate regime. Now, the rates applicable to only NRI deposits are regulated but that is also likely to go as and when India adopts capital account convertibility. In a notification, the central bank said banks were now “free to determine their savings bank deposit rate” with immediate effect. Within hours the private sector Yes Bank hiked its savings bank account interest rate by two percent. Soon, it was Kotak Mahindra Bank ltd., and others are expected to follow suit as competition to woo savings bank depositors hots up. Savings account rates have traditionally been very low and have never matched up to the high rates of inflation. It would actually mean that keeping money in a savings account was a loss-making proposition. Yet, we must understand that most people have been keeping large sums in savings accounts simply for mthe reason that their salaries are credited to such accounts and most have lacked the knowledge and skills to quickly deploy it to other more fruitful investment options. The savings account rate remained static at 3.5 percent for more than eight years before it was hiked by 0.5 percent in April this year. Now some banks are offering up to six percent on such deposits. Until 2010, the average cost for banks for such accounts was at around 2.8 percent because they used to pay interest only on the minimum balance kept between the 10th and the end of a month. From April, they have been paying interest rate on a daily average basis. Regulations of deposit rates were first enforced in September 1964. In September 1969, RBI banned interest payment on current accounts and deposits of up to 14 days. From 1979 onwards, almost all deposit rates were administered. In April 1992, banks were allowed to fix interest rates on term deposits of 46 days to three years and more within the ceiling prescribed by RBI. In October 1995, banks were given the freedom to fix rates on domestic term deposits over two years. It was only in October 1997 that interest rates on term deposits were totally deregulated. A year later, the minimum maturity of term deposits was reduced from 30 days to 15 days and it dropped further to seven days in 2002, only for wholesale deposits of at least `1.5 m. Now even retail customers can keep any amount for seven days. Meanwhile, public sector lender Indian Bank has revised its Foreign Currency Non-Resident and Non-Resident (External) deposits interest rates. For FCNR(B) deposits, in USD terms, the revised interest rates has been fixed at 1.94 percent as against 1.86 percent for deposits of one year and above but less than two years. For deposits of two years and above but less than three years, it has been revised to 1.61 percent from 1.56 percent during the same period of previous year. The rates for deposits of three years and above but less than four years has been hiked to 1.77 percent from the existing 1.72 percent. For deposits of four years and above but less than five years has been fixed to 2.05 percent from the existing 1.98 percent. For deposits of five years only, the interest rates has been hiked to 2.37 percent as against existing 2.24 percent. For NR(E) term deposits, the revised interest rates has been fixed at 2.69 percent for one year and above but less than two years (2.61 percent existing). For two years and above but less than three years it has been fixed at 2.36 percent from 2.31 percent. The bank said that for deposits of three years and above and up to five years the rate has been fixed to 2.52 percent. On its part, the Kerala-based old-generation private lender, Federal Bank, has started accepting FCNR deposits in three more currencies and also hiked the interest rates on non-resident term deposits. FCNR deposits in the US dollar will get 1.94 percent to 2.69 percent in select maturities. The State Bank of Hyderabad has launched a new product which will give double benefit to customers. A customer who deposits, say `1,000, in this scheme will see it double in just 87 months. The yields achieved are 13.84 percent (general customers) and 14.56 percent (senior citizens) respectively. There will be no premature penalty if the customer withdraws the deposit after 60 months, in addition to the higher rate of interest. The product would be available to all resident.

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