Savings rate war: Don't switch your bank

With a slew of banks alluring customers with 6 to 7 per cent annual return – instead of the staid 3 to 4 per cent -- on savings account deposits, customers are confused if they should switch their savings account to these banks. Salil Dhawan of Investment-mantra suggests you shouldn't.

With the RBI deregularising savings account interest rate, smaller banks with low CASA (current account to savings account) are aggressively looking to lure more customers by providing attractive interest rate on savings account. New age private sector banks are providing attractive interest rate on savings account to its customers.

What such changes mean to banks?

Smaller banks will try to seize such an opportunity and try to make this as a selling point to attract new customers. Smaller banks have already increased savings account interest rate in comparison to larger banks to increase their deposits. Large banks will find it much more difficult to increase interest rates as increasing rate by even a small percentage point will lead to significant increase in costs. In nutshell there will be increased competition among banks.

Courtesy: Investment-mantra.in

What such changes mean to customers?

Customers will have lot more options to choose from then they originally had. In addition, they can expect good customer experience as banks will try even harder now to retain their existing customers.

So should you switch to a new bank or keep your existing account in bigger banks intact? Here's a detailed analysis.

Long term customers with your bank matters. For customers who have been associated with the bank for a long time, there is a whole host of incentives extended by banks to such customers. So investors should stay put with the bank.

Getting a home loan, auto loan or any other loan is lot more convenient if you are associated with the bank for a long time. So think about it before changing the bank.

2. Interest rates will vary with time

Do remember that savings rate percentage can go in either direction since its deregularised. So going forward saving rates can very well come down and you should not be caught off guard on such a move.

3. Look for other charges applicable

New age banks normally have comparatively high charges on various services they provide. Readers should go through all the charges applicable and decide accordingly. High interest on savings rate should not be neutralised by whole host of additional charges levied by banks.

Investors who maintain high balance in their account will benefit more. If you divert your monthly salary into other investment avenues and keep low balance in savings account, changing the bank won't make much of a difference.

5. Evaluate services provided by bank

Services provided by banks hold must greater significance for the customers in the long run. If you are very satisfied with the services provided the bank, it makes a strong case not to change your existing bank.

In spite of above pointers if you believe your shifting to a new bank providing high interest rate makes sense, do keep in mind the points mentioned below while shifting to a new bank.

6. Make a note of existing ECS debit mandate

If you are looking to open an account in bank providing high interest on savings account, make sure you need to have your ECS debit mandate shifted to the new bank. It can be an ECS mandate for deduction of home loan EMI, electricity bill, telephone bill, etc.

7. Remember to close your old account

In case you have opted for a new account, do make sure to proceed towards closing your old account. Not doing so will result in too many redundant accounts difficult for one to manage.

Bottom line

Evaluate all the above points before switching to a new bank. For some customers, it will make sense and for some it may not. High interest rates must be coupled with good services provided by the bank to its customers and low charges on other services.