SBI cuts savings account rate to 3.5%: Why the bank did it? What should the savers do?

State Bank of India, the country’s largest lender, has cut interest rates on savings bank deposits of up to Rs 1 cr by 0.50 percentage points effective Monday (31 July). The rate now stands at 3.50 percent on deposits below Rs 1 crore. “The Bank is introducing 2 tier saving bank interest rate w.e.f. 31st July, 2017. While balance above Rs 1 crore will continue to earn interest rate at 4 percent per annum, the interest rate at 3.5 percent per annum shall be offered on balances of Rs 1 crore and below,” SBI said in a press release. [caption id=“attachment_3737285” align=“alignleft” width=“380”]  Reuters[/caption] Why was it done: Explaining the rationale behind the move, the bank said: “The decline in the rate of inflation and high real interest rates are the primary considerations warranting a revision in the rate of interest on savings bank deposits.” Retail inflation in June stood at a record low of 1.54 percent. Real interest rate is the interest rate a saver gets after adjusting for inflation. The sharp decline in inflation would have boosted the interest rates. What it means for customers: The move, according to the bank, will help the bank retain its lending rates based on MCLR at the current levels. This will benefit a large number of retail borrowers in agriculture, SME, and affordable housing category, it said. But that’s benefit for the borrower. The case of a saver is different. If you have a savings account with a deposit less than Rs 1 crore, you will now earn 50 basis points less. Ideally, you should not hold huge amounts in your savings accounts. But if you still do, SBI’s move is a wake-up call to set your financial planning in order. As a principle of financial planning, you should keep in your savings account an amount that can cover your expenses for three months. Separately, you should have a similar amount parked in a liquid fund too. If you currently hold more than three months of monthly expense, you are playing the money game wrong. When you park cash in a savings account which offers lower return, you are paying an opportunity cost and anyway losing out on earning more money. With SBI reducing interest, it will be a greater loss. But still if you have a huge amount in your savings bank account, it is time for you move out from SBI. There are a number of banks that are offering better interest on savings accounts like Kotak Bank Ltd, YES Bank Ltd and the like. Even if your savings bank account is not your emergency account, but just an account where you actually save your money, why would you settle for a smaller rate when there are better rates out there? So use the opportunity and migrate. Of course, some might argue that fee for transactions at the largest bank is much lesser than some of its counter parts. But, then you can easily shift to online or mobile banking and cut down the number of cash transactions. So, in short, SBI’s move should force you to take a re-look at your financial planning and introduce better discipline. Stop being a lazy saver.