Savings bank deposits are offering more than short term FDs

Almost all the banks have started reducing the interest rates on their deposits therefore the deposits kept for short tenure are earning lesser than the savings bank deposits. The public sector after renewing their deposits rates are offering very low interest rates on short-term deposits than the rates offered on deposits kept in savings bank accounts.

Therefore the customers will be in loss in case they have made short-term FDs than what they are earning by keeping the amount in their savings bank deposits.

According to bankers the trend aim towards the banks’ repulsion towards fresh deposits in a situation where the financial system is flush with liquidity that has no takers.

Some of the public sector banks on the maturities between seven days and 14 days are offering interest rates of as low as 3 per cent, whereas on the savings bank rate there is a uniform rate of 3.5 per cent for all banks.

However the Bank of India and Bank of Baroda are giving 3 per cent for maturities between seven days and 14 days, whereas Punjab National Bank (PNB) is offering as low as 2.5 per cent per annum for deposits of same maturities. On the other hand Union Bank of India is offering 3.5 per cent per annum on deposits, having maturities of 14 days or less, is similar to the savings bank rate.

Moreover on maturities of 30 days, some banks are giving less than 3.5 per cent. While, the PNB on one month is giving a meager 3 per cent interest, while Bank of India is offering its customers a measly 3.25 per cent interest.

However, State Bank of India, the country’s largest commercial bank, is giving 4 per cent even on deposits with maturity tenure from seven days up to 45 days.

The individuals with temporary excess liquidity and who might be requiring the money in the near future invest for short-term and they invest their excess cash in maturities that suit their requirements. In the recent months the banks have done sharp reduction in interest rate for short-term deposits with maturity tenure of up to 30 days. In October 2008, a customer was offered around 5 per cent on maturities of one month or so.

S Raman, executive director, Union Bank of India told Financial Chronicle, “Banks have been offering lower interest rates at the short end because there is ample liquidity in the system. In any case, banks are offering retail customers much more than what we are offering to bulk depositors”.

While on bulk deposits of such short maturities of similar tenure, banks are giving interest rates of around 2 per cent. Amid those offering the lowest rates is PNB with 1.5 per cent for seven-14 days bulk deposits.

“Prima facie the interest rate of 3 per cent on maturities of 30 days may seem lower than 3.5 per cent offered on saving accounts. But in actual practice, there might not be much of a difference. While a customer gets interest rate for all 30 days for a 30-day term deposits, he or she gets interest for a shorter period in case of savings bank account. This effectively lowers the interest rates,” informed L P Agarwal, chief general manager, PNB.

Currently banks give interest for only 20 days to the customers on a savings account that too on the least amount kept between 10th day and last day of a particular month.

Soon the calculation method of interest rate on savings deposit is going to change as the RBI has issued new directives for the calculation of interest on savings accounts on a day to day basis throughout the month from April 1, 2010.