When the repo rate (rate at which banks borrow from the RBI) was brought down to 5.15 per cent late last year, it hit a multi-year low and was widely expected to move upwards, rather than downwards from that point. But then, desperate times call for desperate measures. And here we are, 75 basis points lower at 4.40 per cent.

While banks are encouraged to lower the lending rates to provide a fillip to spending in a beaten down economy, the downside of a fall in repo rate is a slash in interest rates on the humble savings bank account (SB A/C). For instance, State Bank of India (SBI) has now brought down SB interest rates to a mere 2.75 per cent. ICICI Bank offers only 3.25 per cent on SB A/Cs (on balances below ₹50 lakh) from April 9, instead of the earlier 3.5 per cent. Kotak Bank, which used to offer much higher rates earlier, has slashed it to 4.5 per cent on balances above ₹1 lakh and 3.75 per cent on balances up to ₹1 lakh since April 20.

These moves come at a time when many of us may want to hold larger sums as a back-up in our SB A/Cs for emergency needs, considering the extraordinary situation that we are in today.

Don’t lose heart. There are ways to maximise the returns in your SB A/C without giving up on the instant access to the funds and without taking undue risk.

Ways to optimise

One way is to open an account in a bank which offers better returns on SB A/Cs and move your funds there. Many small finance banks fit the bill. For example, Fincare and Suryoday offer 6 - 7.25 per cent returns. But in times of a lockdown, it is easier said than done. Besides, for many who have been having a relationship with a bank for some time ― especially salary account holders ― it is more comfortable to continue with the existing bank. Having multiple SB A/Cs can also be overwhelming in terms of monitoring, managing and moving the balances, maintaining the cards and cheque books, and not to forget, remembering the passwords.

Besides this, liquid mutual funds are an option to hold money that we may require at short notice, which at the same time has potential to fetch higher returns. But then, they are subject to market risks and are a no-no if you are not market savvy.

You can invest in FDs and RDs. But liquidating them has its downside. Premature closure invites penalties, eating into your return. Sometimes, there might also be a lock-in of a few months before premature withdrawal is allowed.

Thus, keeping sums in the existing SB A/C seems to be a better option for many. Here, you can use flexi-deposits and sweep option facilities as these bring you the best of both worlds ― higher interest than what your SB A/C can fetch as well as instant liquidity without penalties or lock-in.

Flexi / sweep options

Flexi deposits are deposits linked to your SB A/C. If you have huge sums lying in your SB A/C, you can create a linked fixed deposit for a specific tenure. This amount will earn as much interest as a normal FD of a similar tenure. True, FD rates have been on a downhill ride. But both public and private sector banks offer 5 - 7.5 per cent returns on FDs across tenures ― still higher than the SB rate.

The advantage of flexi deposits is that, if your SB A/C falls short of money when you are executing a transaction, the sums in this deposit will be transferred back to the SB A/C. The balance held in the deposit will continue to earn higher interest until it is swept back for another transaction to go through, if necessary.

Convenient, isn’t it? But the only thing to remember here is that the creation of the deposit is not automatic. You must create an FD manually every time you feel there is excess money lying in your SB A/C. The sweep option overcomes this problem.

Under the sweep option, you can give instructions to your bank to shift (sweep) balances over and above a particular amount, automatically into a deposit. Similar to linked FDs, they will earn interest applicable to an FD of the chosen tenure. If there is a shortfall when you swipe your card or issue a cheque, the funds are then reversed (reverse sweep) to your SB A/C.

Check list

While setting up the above options, there are a few things that you should know:

One, lower the trigger for moving amounts to the FD, the better. For instance, SBI’s Savings Plus account sets the trigger at ₹25,000. The minimum sweep deposit is ₹10,000. On the other hand, the trigger for sweep into an FD from HDFC Savings Max is ₹1 lakh. The minimum amount that will be swept is ₹25,000. That could mean that funds up to ₹1.25 lakh will stay idle in your savings account, which could have earned more interest had the trigger been lower.

Two, flexibility to choose the tenure at the time of initial deposit as well as the time of renewal helps maximise returns. Axis Bank, for example, offers six months to five years tenure for its Encash 24 flexi-deposits. However, some banks don’t leave that choice to customers. Bank of Baroda’s Super Savings Account, sweeps out excess funds only to a 181-day deposits.

Three, compounding of interest is desirable. City Union Bank’s Flexifix FD, for example, does not compound the interest and only a simple interest is paid out.

Four, for transfer of funds from the deposit back to your account when there is a shortfall (reverse sweep), the lower the trigger for reversal, the better it is for your interest earnings. If your account is falling short of say, ₹950 to execute a transaction, but the bank has a policy of reversing in multiples of ₹10,000, then the remaining ₹9,050 may again be idling in the SB A/C for some time. But if the trigger is at a lower ₹1,000, you will benefit. Most banks reverse the funds in the 'Last in First Out' method.

Five, some banks may charge a penalty for premature closure of flexi deposits.

To make the best of these tough times, the trick lies in being nimble on your feet.

In a nutshell

· SB A/C interest rates are dismal

· Flexi / Sweep deposits give higher returns and liquidity

· Know the fine print to derive maximum benefit

Related Topics
comment COMMENT NOW