The first step to saving money is usually to deposit it into a bank that offers a good interest rate. Recent trends have however shown us that the interest rate is greater in banks which are comparatively smaller than that offered by the big players.
Some examples are SBI which is the largest lender in India followed by ICICI bank. Both offer 8-9% interest on fixed deposit’s below 1 crore. They are closely followed by Bank of Baroda which offers 9% interest as well. However their smaller counterparts such as City Union bank, Karnataka bank ltd, Lakshmi Vilas Bank etc, you are offered from 9.50% to 9.75% for the same duration.
Why rates are better
The reasons for the difference in interest rates are mainly due to the following reasons.
Fund sourcing is tougher for smaller banks according to financial experts. In this field the bigger banks have more power over the certificate of deposits and commercial papers. This cost is higher for smaller banks hence they offer higher rates of interest to increase their fund sources.
The second reason is for marketing purposes. Smaller banks can attract customers through these lucrative rates of interests as they do not have enough connectivity or branches to attract a customer’s attention. Also in India, fixed deposits are relatively risk free as you are covered up to 1 lakh in amount. If a bank undergoes liquidation the government provides you with up to a maximum 1 lakh which is the insurance amount.
Certain banks also offer higher rates of interest for a shorter period of time so it may be a wise decision to lock in your money for a week instead of looking for a better rate of interest over the period of a year. These tactics are mainly carried out to attract customers without providing higher rates of interest. The target market for such schemes is usually customers with large cash in accounts. These are also known as auto sweep and sweep in options. In this scheme the fixed deposit is connected to the savings account. The minimum is maintained in the savings account and the remaining is automatically transferred to the fixed deposit.
In case of any cash required that exceeds the amount in the savings account, the amount is withdrawn from the fixed deposit account to cover the deficit. When this happens the remaining funds continue to enjoy the high rate of interest whereas the transferred funds avail the short term interest rate for the period they remain in the bank for.
However if you look at the bigger picture, an average of a 2% increase in an interest rate hardly makes any difference. Therefore most people do not bother switching their banks to avail greater interest schemes. The other reasons why one may not want to switch their accounts could be the following. A fixed deposits account also has a lot of other activities linked to it. These can be the EMIs and the ECs. If you switch your bank you would have to make an effort to unlink and re-link your loans and other instalment schemes to your new accounts. It is also essential to stick to a bank that is easily accessible in every area.
Banking is a service that can be required at any point of time at any place and if your bank has low connectivity you might have to face a lot of trouble. Certain banks also have stringent rules about having a certain amount of minimum balance that needs to be maintained. For instance Kotak Mahindra requires a minimum quarterly average balance of Rs. 10000 or a price as a penalty is imposed. Other banks such as Yes Bank and IndusInd bank require Rs 5000. In most cases high rates of interest are just lucrative tactics to get customers to switch banks.
The selection should not be done merely on the basis of high interest rate but also for the convenience and ease of service the bank offers. Schemes such as sweep-ins are also good decisions that should be considered before one decides to leave their bank and opt for a newer one.