Post demonetisation, a cut in bank savings deposits rates was in the offing.

Regular readers will recollect an article PersonalFN published in December 2016 - Why Interest Rates On Your Savings A/c Will Be Lowered. SBI Chairman, Arundhati Bhattacharya, had highlighted at the time that 30%-40% of the money coming into savings bank accounts may not flow back out. The additional liquidity, leading to a higher cost of funds, will prompt bankers to cut the savings deposit rate, she had cautioned.

That’s why on July 31, 2017, when the country’s largest commercial bank, the State Bank of India, cut savings bank deposit rates by 50 basis points (bps) to 3.50%, it did not surprise us. Over the past 10 days, other banks too, reduced their rates to the same extent. In the days to come, many more will soon jump on the bandwagon.

With a fall in interest rates and low inflation, it was natural for banks to cut deposit rates, however, what caught our attention were the conditions imposed by the banks.

Most banks introduced a slab structure for savings deposit rates.

For example, SBI has cut rates only for deposits up to Rs 1 crore. Deposits of Rs 1 crore and above lying in a SBI savings account will continue to earn an interest of 4% as before. Similarly, Axis Bank and Bank of Baroda reduced the rate to 3.50% for deposits of up to Rs 50 lakh.

Karnataka Bank, took the rate structure to another extreme. The Bank introduced four slabs, increasing rates for deposits above Rs 1 crore, while reducing rates for deposits less than Rs 50 lakh. Earlier, the bank offered 4% on all deposits, now they have introduced slabs as below -
 

Deposit Slab	Interest Rate
Upto & including Rs.1 lakh	3%
Rs.1 lakh - Rs.50 lakh	3.5%
Rs.50 lakh - Rs.100 lakh	4%
Above Rs.100 lakh	5%

(Source: www.karnatakabank.com, PersonalFN Research)

Barring a few banks that paid a savings interest rate of upto 6% on deposits, a structure for savings deposit rates was practically unheard of. There were no slabs earlier and all individuals, irrespective of whether they had a deposit of Rs 10,000 or Rs 1 crore, earned the same interest rate of 4%.

With the new rate structure, it becomes clear that high net worth individuals will remain unaffected or even benefit (if they have an account with Karnataka Bank), while the middle class, the bulk of those who have deposits worth a few lakhs, will earn a lower rate on their savings.

Kotak Mahindra Bank is the only bank that has bucked the trend. It’s the only bank to have cut interest rates for deposits above Rs 1 crore. The bank reduced the deposit rate by 50 bps to 5.5% for savings deposits between Rs 1 crore to Rs 5 crore. The rate for the remaining slabs remains unchanged. The 6% rate continues for savings deposits between Rs 1 lakh to Rs 1 crore.

What are your alternatives?

Whether it’s a contingency fund or money kept for near-term expenses, we all keep a sizable amount of cash in a bank savings accounts. The alternatives to park short-term funds are few. One can choose from arbitrage funds , liquids funds or the favourite of all savers, a savings bank account. PersonalFN has compared these avenues in the article– Arbitrage Funds vs. Liquid Funds vs. Savings Bank A/C: How to Park Your Short-Term Funds. It will give you insights into each avenue, so you can make an informed decision.

For immediate liquidity needs, a savings bank account is the clear winner. However, the low interest rates and tax liability is a major disadvantage.

Though arbitrage schemes are the most tax-efficient, returns will depend on market conditions and the fund managers ability to reap rewards from mispricing of securities. Thus, the returns may be inconsistent.

This leaves us with liquid funds. A liquid fund may turn out to be more tax-efficient than a savings account, especially if you are setting aside money for a contingency. These funds earn a higher return and are less volatile. Instant liquidity is the only issue. Redemption may take up to three working days to be credited to your bank account. However, some fund houses have addressed this issue, offering instant liquidity for certain liquid funds they manage.

Under the instant redemption facility, it takes under 30 minutes to transfer the redemption amount to your bank account. Some of the key features of the facility are highlighted below:

• Uses the Immediate Payment Service (IMPS) provided by various banks
• You will receive the funds in your bank account in less than 30 minutes
• You can withdraw Rs 50,000 a day or 90% of your folio's value, whichever is lower.
• This facility is available 365 days, 24x7

In April 2017, at its board meeting, the Securities and Exchange Board of India (SEBI) allowed liquid funds to offer instant redemption facility and laid out certain conditions. While this is still to be implemented industry-wide, many funds houses have started offering this facility to their investors.

Thus, liquid funds can prove more rewarding and tax efficient. But you ought to take enough care when selecting winning schemes for your investment portfolio, because debt funds aren’t risk-free.

If you need research backed recommendations to select the best debt mutual fund schemes for your portfolio, opt for PersonalFN's DebtSelect research reports. Our superlative guidance will certainly help you on the path to wealth creation. You can be rest assured about the ethical and unbiased nature of this service.

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