Gone are the days when bank account holders earned 4% interest rate even on the smallest amount kept in their savings accounts. Many large prominent banks are now offering much lower savings account interest rates in the range of 2.70% to 3% on the lowest deposit base. However, the interest rate on the post office saving account has remained unchanged at 4%. Bank retail depositors have been forced to be contained with a lower return on their savings account balance. However, the situation is likely to change for the better for small depositors as the issue has come to the notice of the Reserve Bank of India (RBI). The central bank has been pushing banks to raise their interest rates on saving accounts.
A research report from Emkay Global Financial Services highlighted that saving account rates have been largely stagnant and lower, at less than 4% for around 75% of the saving deposit pool despite a 250 bps increase in repo rate and higher Consumer Price Inflation (CPI). It is worthwhile to note that a few banks such as SBI have linked their savings account interest rates to the repo rate. This has possibly attracted the attention of the RBI, leading to recent statements by the regulator that the near-stagnant/lower savings account rate does not lead to effective policy transmission (repo increased by 250 bps) and, thus, banks should consider raising it.
A news report by Reuters published on October 25, 2023 indicated that the RBI was already nudging banks at meetings to raise savings deposit rates and the central bank might need to push them again if required. So, if the central bank follows it up in its upcoming Monetary Policy Committee (MPC) on December 8, retail depositors are likely to get a higher return on their small deposits.
Few banks offer higher rates but not the large banks
The Emkay report says that many banks with relatively sub-optimal liability franchises increased their savings account rates (for example Yes Bank and Kotak Mahindra Bank) post the savings account de-regulation in 2011, to catch up with large peers. Even new-age banks being later entrants, including SFBs (Ujjivan, Equitas and AU) and universal banks (IDFCB, Bandhan and RBL), offered higher savings account rates to mobilize these deposits. However, this was limited and most of the large banks have been offering a much lower rate.
Why banks started offering lower rates to retail depositors
After interest rates on saving bank accounts was deregulated from October 25, 2011, banks are now free to determine their savings bank deposit interest rates. Prior to this, saving bank account interest rates were fixed by RBI and it was last raised by RBI to 4% on May 3, 2011. However, this high interest rate regime did not last for very long after the deregulation. Minimum Interest Rate on bank saving account
Banks | Balance Requirement | Interest Rate |
State Bank of India | Below Rs 10 crore | 2.70% |
Punjab National Bank | Below Rs 10 lakh | 2.70% |
Canara Bank | Below Rs 50 lakh | 2.90% |
Bank or Baroda | Below Rs 1 lakh | 2.75% |
Bank of India | Up to Rs 1 lakh | 2.75% |
Indian Overseas Bank | Up to Rs 1 crore | 2.75% |
HDFC Bank | Below Rs 50 lakh | 3% |
ICICI Bank | Below Rs 50 lakh | 3% |
Kotak Mahindra Bank | Below Rs 50 lakh | 4% |
Axis Bank | Below Rs 50 lakh | 3% |
IndusInd Bank | Below Rs 1 lakh | 3.50% |
Yes Bank | Below Rs 1 lakh | 3.50% |
RBL Bank | Up to Rs 1 lakh | 4.25% |
IDFC First Bank | Up to Rs 1 lakh | 3% |
Bandhan Bank | Up to Rs 1 lakh | 3% |
Source: Respective websites of the banks
Banks prefer deferential rates on varying balances
While the 4% interest rate on savings accounts continued for some time, however, the situation changed significantly in 2017. The biggest public sector bank, SBI, reduced its interest rate and started offering differential rates on different balances in saving bank accounts effective from May 1, 2017. While it offered 3.5% on deposits up to Rs 1 lakh. For deposits above Rs 1 lakh the interest rate offered was much lower at 3.25%. Most of the other banks followed suit and it became an industry-wide practice.
Maximum Interest Rate on bank saving accounts
Bank | Balance Requirement | Highest Rate |
State Bank of India | Rs 10 crore and above | 3% |
Punjab National Bank | Rs 100 crore and above | 3% |
Canara Bank | Rs 2000 crore and above | 4% |
Bank or Baroda | Rs 1000 crore and above | 3.35% |
Bank of India | Above Rs 1 lakh | 2.90% |
Indian Overseas Bank | Above Rs 1 crore | 2.90% |
HDFC Bank | Above Rs 50 lakh | 3.50% |
ICICI Bank | Above Rs 50 lakh | 3.50% |
Kotak Mahindra Bank | Above Rs 50 lakh | 4.00% |
Axis Bank | Rs 2000 crore and above | Overnight MiIBOR + 0.70% |
IndusInd Bank | Above Rs. 25 lakhs and up to Rs. 50 cr | 6.75% |
Yes Bank | Rs 10 lakh or above and less than Rs 5 cr | 7.00% |
RBL Bank | Above INR 25 lakh and up to Rs 2 Cr | 7.50% |
IDFC First Bank | Above Rs 5 Lakh and up to 25 cr | 7% |
Bandhan Bank | Above ₹250 crore | 8.05% |
Source: Respective websites of the banks
Retail depositors started getting lowest interest rate on savings account
While retail depositors with lower balances got a higher interest rate for some time after the deregulation of the interest rate, however, the situation changed in 2022 when banks started offering higher rates on bulk deposits. Since October 2022, SBI has offered 3% interest rate on deposits of Rs 10 crore or more while on other deposits up to Rs 10 crore it gives only 2.70%. This is the same case with other banks as well.
RBI is likely to continue pushing banks to raise their saving deposit rates
With the RBI MPC scheduled on December 8, many are expecting the central bank to nudge banks to raise their interest rates on saving bank accounts. “We believe that instead of openly directing banks to increase SA deposit rates and sending inaccurate signals to the market, an RBI nudge could come via asking banks to effectively link SA deposit rates to repo or other benchmark rates,” says the Emkay report.
However, it looks unlikely that the RBI would go for re-regulation of the interest rate on saving accounts. “RBI may opt for softly prodding banks, instead of re-regulating the SA rate via any official directive,” suggests the Emkay report.