SBI cut interest rate of saving bank account from 4% p.a. to 3.5% p.a. in July 2017.
After SBI, a few other banks have followed suit and cuts savings bank interest rate to 3.5% p.a.
What should you do?
Relax. There is nothing you can do. Learn to live with it.
Frankly, resisting this change may not be worth your time.
In the informal discussions, I was part of, people blamed predatory policies of banks and how this was a result of anti-consumer policies of the Government of the day.
I came across a few alternatives too (with obvious flaws). Let’s look at some of them.
#1 Switch to another bank.
What if the new bank cuts the rate too?
A few banks have been offering much higher rates (5-7% p.a.) on savings bank account for a few years now. Why didn’t you switch to those banks all these years?
You were earning 4% p.a. all these years but did not change your bank.
What has changed now?
#2 Shift to mutual funds
I am not talking about keeping money in equity funds, which would have been an absurd solution.
I am talking about liquid funds and other short term debt funds.
Can debt funds ever provide the kind of liquidity that your savings bank account provides?
Let’s now try to answer a basic question.
Why do you need a savings bank account?
So that you can access your funds easily when you need.
You can withdraw from ATM or swipe your debit card. You can use your debit card or net banking portal for electronic transactions.
Other alternatives to keeping money in savings bank account should provide similar easy access.
Let’s see how various financial instruments rank in terms of liquidity and ease of access.
There is a limit to how much cash you will keep. And cash earns zero interest.
Savings account balance earns at the least 3.5% p.a.
In any case, if you need to make an electronic transfer or purchase, you need to put this money in your savings bank account.
#2 Fixed deposits /Auto-sweep accounts
Rather than keeping money in savings account you can make FDs out of it.
You can break your FD prematurely, if required, by paying a penalty.
However, you may have to visit a bank branch to close your fixed deposit. And the bank branches may be closed and weekends and holidays.
This can be managed if your bank permits opening and closing fixed deposits online (and you are comfortable with online transactions). Internet connectivity can be an issue with this option.
Have written about auto-sweep accounts in another post. Looks like a good choice but there are a few caveats.
#3 Liquid funds
On redemptions, you get the money the next business day and weekends are not business days. Therefore, the money in liquid funds may not be as liquid.
After SEBI permission, a few funds may have started instant redemptions from liquid funds up to Rs 50,000 per day. As I understand, this can only be done online. Therefore, you have to comfortable with online transactions.
With instant redemption facility, you can keep a good share of liquid or emergency funds in liquid funds. However, this does not do away with the need for a reasonable balance in the savings bank account.
What if you cannot access the website due to lack of internet connectivity? Bank ATM connectivity is much more robust.
Another option is Credit cards
With credit cards, you can spend now and pay later. To pay credit card bill, you can redeem your investments or use regular cash inflow to pay the bill.
You can redeem your investment (say in liquid fund) just before paying the bill. In that case, saving account interest rate will not worry you. Seems like a good option.
The problem, however, is acceptance. Credit cards are widely accepted in bigger cities (at least at bigger facilities) but not so much in smaller cities.
It is not uncommon for retailers/counters to refuse to accept cards or demand a premium for card payment. Moreover, many times, these machines don’t work (or so we are told) for one reason or the other.
With savings account balance, you can go to the nearest ATM and withdraw money.
Savings account serves a purpose in your overall expense management and simply can’t be done away with. You need to keep some money in your savings bank account and live with whatever interest you get.
How much money do you keep in your savings bank account?
Let’s assume your average daily balance is Rs 1 lac.
At 4% p.a. , you will earn Rs 4,000 during a year.
At 3.5% p.a., you will earn Rs 3,500 during the year.
The difference is only Rs 500 for the year. Therefore, the hit may not be meaningful.
Clearly, the difference will grow only if the average balance is higher.
However, if you are keeping too high a balance in your savings account for no reason, you need to consider your saving habits.
For instance, if you keep Rs 10 lacs in your savings bank account, you need a solid reason for it, such as an impending expense or a medical emergency in the family. Quite likely this will be a temporary choice.
I see no reason for such high savings account balance on a regular basis.
Keep a reasonable amount in savings bank account. Reasonable is subjective. It could be Rs 25,000, Rs 50,000, Rs 1 lac or much higher. A high saving account balance is quite comforting to many of us.
Anything above, you can put in liquid funds or high credit quality ultra short term debt funds or even bank fixed deposits. But yes, don’t ignore the risk in debt mutual funds.
Having a credit card can also provide a buffer in emergency cases.