Interest rates on small savings schemes for financial year 2014-2015

Government has announced interest rates on small savings schemes for financial year 2014-2015.  This is in line with recommendations of Shyamala Gopinath Committee for Comprehensive Review of National Small Savings Fund.

Interest Rates on small savings schemes

While interest rates for most of the instrument types have remained unchanged, rates on post office time deposits have been revised upwards by 10 bps to 20 bps (100 bps is equivalent to 1 percentage point.).  Public Provident Fund remains one of the best option for long term secured investment.

Tax Free Bonds – who should invests?

This seems to be the season for tax free bonds.  We have already seen issues from REC, HUDCO and IIFCL; and now, PFC and NHPC have join the bandwagon.  Significant efforts are spent by media in analyzing all the issues i.e. what they offer to investors and which is the best one to invest.  In this article, we shall not look into that but focus more on who should invest in such issues and what aspects the investor needs to take care of before investing in tax-free bonds.  Before that, a synopsis of the ongoing PFC and NHPC bond issue.

PFC and NHPC issue

Bond issues for PFC and NHPC are open right now offering bonds for 10, 15 and 20 years for similar tenure.  Below are the brief details about both the bond issues:

The issue is priced at attractive rates which is same for both PFC and NHPC issue.  These being tax free bonds, any interest received on these bonds is tax free. Accordingly, if one considers pre-tax returns, they are higher than what long term debt mutual funds have provided in last 5 years (7.83% p.a. pre-tax returns as per Value Research).

Pre-tax Returns on PFC and NHPC tax free bonds

Interest Rates	Tax Bracket
	10%	20%	30%
8.43%	9.37%	10.54%	12.04%
8.79%	9.77%	10.99%	12.56%
8.92%	9.91%	11.15%	12.74%

Who should invest in such bonds?

The interest rates are excellent, risk is at the nadir and tenure is long term.  So whether all and sundry should invest in such bonds?  The answer obviously is no.  One needs to take care of following aspects before deciding to invest in these and any other tax-free bonds:

1. This is a long term investment.  Though the bonds are listed and can be traded, one needs to assume that they will not get back the money before the tenure of investment.  Even if there is 1% probability of you requiring the money anytime during the tenure, then one should not consider this investment. 
2. The pre-tax returns decreases for investors falling in lower tax brackets.  So in case you are in 30% tax category bracket, the investment makes more sense to you rather than for people falling under 10% tax category bracket.
3. If you have any loans outstanding, whether it is credit card loan, personal loan, car loan, home loan, etc, the money should be utilized in paying back the loan rather than investing in tax free bonds.
4. These bonds offers good returns as compared to debt mutual funds.  In case you are looking for long term investment in debt funds, tax free bonds are also an option to invest.
5. People on the verge of retirement can replicate this as a pension plan with regular income.
6. PPF returns are almost at par with returns on tax free bonds, however PPF offers more flexibility in withdrawing the amount when required (e.g. by way of loan) and returns on PPF are cummulative.  Hence one should exhaust PPF investment limit before investing in tax free bonds.

The above list is not exhaustive, but one should take the same into account before investing in tax free bonds.

Are you investing in tax free bonds? Share your reason for investing in the comments section below.

Are you aware about interest rate charged by your credit card company?

It has been long since Sanjay and Sanjana saw each other.  Both were busy in their respective work life.  In addition to that Sanjay was also studying for his professional course, which made it very difficult for him to meet Sanjana.  However, today being his birthday, both of them decided to meet up for lunch and spend the day together.

Sanjana was already waiting at an Italian restaurant when Sanjay arrives in new clothes looking smart.  Sanjana was visibly happy to see him after a long time.  She hugged him and gave birthday wishes.

“Gorgeous birthday boy, thanks for meeting me on your birthday at least. Otherwise where do you find time nowadays to meet me?”  as usual Sanjana started teasing him.

“Come-on Sanjana, you know how much busy I am at work and studying for the exams due next month.  I hardly get time for any other activities.” Sanjay started justifying himself.

Sanjana asked looking at the menu, “So how are your studies going on for the exams?”

“Still only half way through.  I need to devote more time on the studies for the remaining part of the month.  And better I do, otherwise the examination fees shall go in the drain so the loan I have taken.”  Sanjay started cribbing.

Not understanding what Sanjay is saying, Sanjana asked “What’s the relation between your exam and loan?” ordering pastas for both of them.  As usual, she made a choice about what Sanjay should also eat!

“Listen”, Sanjay started explaining, “For the exams, I need to pay examination fees, which were quite substantial and to pay that I took a loan on my credit card.  So if I don’t do well in exams, my loan will go waste.”

Sanjana replied, “Well…irrespective of how much I educate you on money part, you still waste your money.  Taking a loan on your credit card!   How can you make such big mistake?  Are you aware how much this loan cost you?”

“You always take me for granted.  Of course I have learned about and implemented money management.  Moreover, I have taken care of it while taking this loan also.”  Sanjay started his firm defense.

“Is it?  Tell me what did you take care of while taking the loan?”

“First, as you had told me earlier, I made a list of various options I had to take a loan.  Then I compared their terms, interest rates and ease of getting the loan.  Based on these criteria, the loan on credit card was the cheapest and easily available.” replied Sanjay, visibly satisfied with his explanation.

Smelling something fishy, Sanjana questioned, “How did you conclude that the loan on credit card was the cheapest?”

“It’s very simple.  In fact, they are giving me interest free loan.  They are only charging me processing fee of 5% on the loan amount and that’s all.  I only need to repay the loan amount in equal installments over 6 month’s period.  Since there is no interest, it is the cheapest of all”, replied Sanjay brimming with smile.

Stunned by the reply given, Sanjana yelled, “Credit card companies lure you with interest free loans and you fall prey of such offers.  Where did your learning of time value of money go?  Did you compare how much you are paying to credit card company for the loan and at what point of time?”

Seeing Sanjay a bit confused, Sanjana continued, “Listen.  Let me explain to you.  This all is gimmick of time value of money.  They charge you ‘interest’ on the entire amount in the name of processing fee and term it as interest free loan.

“Assume that instead of processing fee, it is 5% interest on loan amount which needs to be paid once at the time of disbursement of loan.  What the credit card company has done is to charge interest on the entire tenure of loan even though you are not using the full loan for the entire tenure.”

“I am not getting this.” confused, Sanjay replied, “Give me an example.”

“Look.” Sanjana started explaining, “For example you took a loan of Rs. 50,000 from your credit card company repayable in 6 equal installments of Rs. 8,333.  Reducing processing fee of 5% from the principal amount, net amount you receive is Rs. 47,500.  This you repay @ Rs. 8,333 in six equal installments.  Simple IRR (internal rate of return) calculations on your excel spreadsheet shall tell you that you have paid yearly interest of more than 19% on this loan amount.

“This is so since you paid the charges on the entire amount and not on the outstanding amount post your installments every month.”

Visibly upset by being again cheated Sanjay said, “I never thought of processing fees as interest cost.  I got lure by the claim that the loan is interest free and there is only one time charge.  But as you explained, time value of money is of utmost importance which calculating interest cost.”

“Bang on.  Now you are on the correct path.  Compare what you are receiving and paying along with the time periods and calculate the cost.  It is very simple to determine by way of excel spreadsheet.  And you shall get the interest cost on the loan you have taken.”  Sanjana added and continued,

“Now, don’t get upset birthday boy.  Let’s celebrate your birthday today and take this lesson as a ‘valuable’ gift from me to you on your birthday.” winked Sanjana.

Change in interest rates of PPF and other small savings schemes

Finance ministry has announced revised interest rates on public provident fund, national savings certificates and other small savings schemes.  These interest rates shall be applicable for financial year 2013-2014.  As we had noted earlier, interest rates of such schemes are now linked to market yields on government securities of comparable maturities and shall be revised every financial year.

Overall there has been a reduction in interest rates by 10 basis points (100 basis points is 1 percentage point) for all savings schemes except for saving deposits on which interest rates continues to be 4% and 1 year time deposits (8.2%).  Interest rates on PPF from April 2013 shall be 8.7% p.a. as against 8.8% p.a. earlier.

The table below summarizes the changes in interest rates:

Scheme	Existing interest rate	Interest rate w.e.f 1st April 2013
Savings Deposits	4.0	4.0
1 Year Time Deposit	8.2	8.2
2 Year Time Deposit	8.3	8.2
3 Year Time Deposit	8.4	8.3
5 Year Time Deposit	8.5	8.4
5 Year Recurring Deposit	8.4	8.3
5 Year SCSS	9.3	9.2
5 Year MIS	8.5	8.4
5 Year NSC	8.6	8.5
10 Year NSC	8.9	8.8
PPF	8.8	8.7

Overall there has been negligible change in the interest rates as compared to 2012-13.

RBI maintains status quo

As against everybodya's expectation, RBI has maintained status quo and left repo rate and CRR unchanged.  Inflation weighed on RBI's monetary policy decision and RBI's press release stated that it "had frontloaded the policy rate reduction in April with a cut of 50 basis points."

Thus no significant change in interest rates offered on fixed deposits by banks is expected anytime soon.  Bachhat updated its page on FD interest rates on 15th June 2012.  Next update shall be around 15th July 2012, unless RBI acts on the rates between two monetary policies.

Interest rates on fixed deposits (Updated as of 15th June 2012)

Before RBI takes any action during its monetary policy review schedule on 18th June 2012, we thought of updating interest rates on fixed deposits offered by various banks.

Looking at the slowdown in growth rates and developments in Europe,  it is widely expected that RBI shall cut either cash reserve ratio or rates.  However, after WPI inflation of 7.55% in May 2012 and upward revision of March 2012 inflation to 7.69%, analysts are not sure whether the rate cut shall be 25 basis points or 50 basis points.  100 basis points equals one percentage point.

The coming week will answer all the queries and Bachhat shall revise the interest rates details shortly thereafter if bank changes their interest rate offerings.

Click here for latest interest rates on fixed deposits

Are fixed deposits’ interest rates headed down?

RBI reduced the repo rates by as much as 50 basis points to 8.0% on 17^th April 2012, more than 25 basis points anticipated by the market participants and analysts.  100 basis points equals to 1 percentage point.  This cut is after 13 consecutive increases in rates since March 2010.  Due to the uncertainty over the global economy and continuing elevated inflation in domestic economy, it is not certain whether RBI will further cut rates during the year, but there shall not be any immediate increase in rates for the time being.

Effect of RBI’s rate cut on fixed deposits’ interest rates

There has been immediate effect of the RBI’s rate cut on fixed deposits’ rates and several banks have reduced interest rates on fixed deposit for all tenures.  Based on Bachhat’s tracking of fixed deposit rates, out of 30 banks which have revised interest rates on fixed deposits since 20^th March 2012 (the latest day on which FD rates were tracked by Bachhat), 22 banks have reduced the interest rates on fixed deposits and most of the reduction in interest rates happened after RBI’s rate cut on 17^th April 2012.  Only 8 banks have increased rates on fixed deposits during this period.  There are 22 banks which have not modified their fixed deposit rates during this period.

For example, Bank of Baroda has revised its interest rates downwards by 50 basis points for all tenures offered.  Similarly IDBI has reduced interest rates by 25 basis points for most of the tenures offered.  Following banks have reduced interest rates on fixed deposits since March 20^th, 2012:

Bank of Baroda	Barclays Bank	Canara Bank
Catholic Syrian Bank	Central Bank of India	Corporation Bank
Federal Bank	ICICI Bank	IDBI Bank
ING Vyasa Bank	Kotak Mahindra Bank	Lakshmi Vilas Bank
Oriental Bank of Commerce	Punjab & Sind Bank	Punjab National Bank
State Bank of India	State Bank of Patiala	State Bank of Travancore
Syndicate Bank	Tamilnad Mercantile Bank	UCO Bank
United Bank of India

Though the interest rates on fixed deposits have reduced since RBI’s rate cut, when compare to increase in fixed deposit rates during last 2 years, the rates are still attractive and for those who have missed the opportunity to lock high interest rates can still take benefit of it.  As regards future rate scenario, it all depends on how RBI reacts which in turn depends on host of events such as inflation, growth, Government’s policy measures and global economy.

To view interest rates on fixed deposits offered by all banks, click here.

Elevated Interest Rates on Fixed Deposits to stay?

Policy actions of last fortnight were eagerly awaited because that would set the tone for the interest rates during the next financial year. 

With effect from 10^th March, RBI reduced Cash Reserve Ratio (CRR) by 75 basis points (one percentage is 100 basis points) from 5.5% to 4.75%.  CRR is the percentage of deposit that commercial banks must keep with RBI.  The CRR cut was expected as the entire banking system was experiencing liquidity tightness and it was expected to be worsen on account of advance tax payments before 15^th March.

In subsequent week, RBI maintained the interest rates during fourth mid quarter review on March 15. 

A day later, finance minister announced the budget for 2012-13 raising the indirect tax levy.  The budget is expected to be inflationary on account of the same. 

With fiscal deficit projected to be 5.1% of GDP in 2012-13, government’s huge borrowing programme for the next year and possibility of inflation to remain high, RBI has tough task ahead to maintain adequate liquidity in the system and inflation low simultaneously.

Effect of interest rates on fixed deposits

The above factors shall ensure that interest rates on loans as well as fixed deposits stay elevated for most part of the next year.

Currently, banks like Tamilnad Mercantile Bank and IDBI are offering interest rate of 10% and 9.5% per annum respectively on fixed deposits for tenure greater than 5 years.  Short term rates for period less than 1 year are also attractive.  

Since the time Bachhat started tracking interest rates on fixed deposits, the average interest rates of all banks for period less than 3 months has increased by 104 basis points and for period between 3 months to 6 months has increased by 82 basis points.  Even for period greater than 5 years, the increase is by 39 basis points.

Tenure	Average Interest Rates (%)		Difference (%)
	8th May 2011	20th March 2012
< 3 months	5.59	6.62	1.04
3 to < 6 months	6.78	7.60	0.82
6 to < 12 months	8.16	8.60	0.44
1 to < 2 years	9.25	9.47	0.22
2 to < 3 years	9.02	9.24	0.21
3 to < 5 years	8.80	9.16	0.36
5 years & above	8.67	9.06	0.39

This is a good time for someone who wants to lock-in to high interest rates on fixed deposits.

One can view the latest interest rates on fixed deposit offered by various banks here.

De-regulation of savings bank deposit interest rates and more

Reserve Bank of India (RBI) announced its second quarter review of Monetary Policy 2011-12 today.  As expected, the repo rate has been hiked by 25 basis points (100 basis points is one percentage) to 8.5%.  The reverse repo rate stands adjusted to 7.5% (spread of 100 basis points below the repo rate).   RBI has stated in its press release that “…momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures, indicate moderation.  This is consistent with the projection that inflation will decline beginning December 2011”.  Thus there are chances that this may be last in series of rate hikes and RBI may take a pause.

De-regulation of Interest Rates

RBI increased interest rates on savings bank deposit to 4% in May 2011.  To complete the process of deregulation of the rates, banks are now free to determine savings bank deposit interest rates, subject to the following two conditions:

1.    for deposits upto Rs. 1 lakh, uniform interest rates shall be offered by all banks.

2.    for deposits above Rs. 1 lakh,  banks are free to provide differential rates of interest.

The operational guidelines, to be released, shall specify how this shall work.  But banks shall not be allowed to discriminate between customers on interest rates for similar amount of deposit.  Thus each bank shall offer different interest rates, depending on the market conditions and interest rate scenarios, on savings bank deposit above Rs. 1 lakh.

Generally it is not advisable to keep substantial amount in savings account since one gets less interest on it.  However it is a positive move considering that traditionally we love to keep money in bank accounts and any increased in interest rates on such deposit is welcome.

Enhancement of Customer Service and no prepayment penalty

Damodaran Committee had made several recommendations for improving customer service in banks.  10 action points on which broad consensus have emerged has been decided to be implemented.  

Key points amongst the 10 actions points are:

1.   No pre-payment penalty for floating rate loans.  However fixed rate loans shall continue to have pre-payment penalty.

2.   Issue of TDS certificate and to dispatch it to account holder’s mailing address.

3.   One view of all bank accounts (savings, fixed deposits, loans, etc) with a bank.

Also Read: Future of banking experience in India 

Though RBI has increased interest rates, which can lead to increase in rates for home and other loans products, deregulation of savings deposit interest rates, abolition of prepayment penalty on floating rate loans and improvement in customer service are few positives from this monetary review announced a day before Diwali. 

Happy Diwali!!!

Latest interest rates on fixed deposits (17th October 2011)

Bachhat has updated the interest rates on fixed deposits offered by various banks.  The updated list (as of 17th October 2011) is available at the following link: http://goo.gl/bko0w

Interesting to note here is since the last rate hike by Reserve Bank of India, very few banks have raised their rates on fixed deposits.  Infact, in some cases, banks have reduced the rates they were offering on fixed deposits for certain tenure.

RBI's next monetary policy is on 25th October and depending on whether RBI goes for rate hike or take a pause, we need to see how the banks react.   

Bachhat  plans to do a post on how the banks react to the monetary policy along with its next update on interest rates which shall be due on 31st October 2011.

Latest Interest Rates on Fixed Deposits (Updated as of 27th September 2011)

Latest interest rates on fixed deposits have been updated at http://goo.gl/JaiFt.  The update is as of 27th September 2011.

Inspite of RBI raising policy rate since our last update of 12th September 2011, there has been not much change in interest rates offered by banks.  Only 5 out of 52  banks tracked by Bachhat have increased their fixed deposit rates between 12th September to 27th September.

This time banks have not raised their base rates also.  Have we reached the stage from where it will be difficult for banks to raise loan as well as fixed deposit rates?  Whether the fixed deposit rates have reached their peaked even though the real interest rate are still negative or negligible?  We shall keep track on these aspects in our subsequent posts.

Keep reading and do continue pouring your suggestions to improve this blog.

Latest Interest Rates on Fixed Deposits (Updated as of 12th September 2011)

Latest interest rates on fixed deposits have been updated at http://goo.gl/JaiFt.  The update is as of 12th September 2011.

Interesting thing to note is there has not been much change in interest rates offered by banks in last two weeks, however 4 out of 8 banks which have changed interest rates have reduced the rates on short tennure fixed deposits!! 

Is this the end of high interest rates being offered on Fixed Deposits and will they start reducing?  It will be interesting to track fixed deposit's rates in near term and see how it pans out.

Click here to view interest rates on fixed deposits offer by banks as of 12th September 2011.

HDFC's fixed cum floating rate home loans

Last week, Bachhat carried a post on ICICI’s newly launched fixed cum floating rate home loans and we also compared it with HDFC and SBI’s existing floating rate home loans.   

Read: ICICI’s Fixed cum Floating Rate Home Loans

Now earlier this week, HDFC has also introduced fixed cum floating rate home loan named “Fixed First”.  It is interesting to notice that many banks had discontinued fixed rate home loans when interest rates started to fall in 2008 and are now encouraging borrowers to take loans with fixed rates for certain tenure citing further rise in interest rates.

About HDFC’s Fixed First:

In HDFC’s Fixed First, the borrower has an option to choose the fixed rate tenure between 3 years or 5 years.  After the chosen period of 3 or 5 years, the loan shall be converted to regular floating rate home loan.  In ICICI’s offering, the option for fixed rate tenure was either 1 year or 2 years.  Thus in Fixed First, the rates shall remain constant for longer tenure as compared to ICICI’s offering. 

The table below gives comparison between HDFC’s and ICICI’s offering:

Loan Amount	HDFC		ICICI
	First 3 Years	First 5 Years	First 1 Year	First 2 Years
Up to Rs 25 Lakhs	10.75%	11.25%	10.50%	10.75%
> Rs. 25.01 Lakhs to Rs. 30 Lakhs	10.75%	11.25%	11.00%	11.25%
> Rs. 30 Lakhs to Rs. 75 Lakhs	11.25%	11.50%	11.00%	11.25%
> Rs. 75 Lakhs	11.75%	11.75%	11.50%	11.75%

Whether one should opt for fixed cum floating rate home loans at this point of time?

As Bachhat had noted in its earlier post on ICICI’s offering, in fixed rate loans, the benefits to borrowers and banks are exactly opposite.   It makes sense for banks to disburse more fixed rate loans when interest rates are at or are nearing peak and are projected to fall in the future.  However, borrowers benefit from fixed rate home loans if interest rates increases after they avail fixed rate loans.

Keeping this in mind, let us check the interest rate (Repo) movement since end of October 2005.

As can be seen from the interest rate chart above, we are almost nearing the peak rate in last six years.  Further, the last time the interest rates peaked, it did not last long and due to occurrence of various global events at that point of time, the rates began to fall.

From the above graph, we can deduce that interest rates are reaching their peak and may not remain high for elongated period and shall fall down.  Whether it shall happen immediately or after 6 months or 1 year is anybody’s guess.  However whatever may be the scenario, it does not makes much sense to tie oneself down to fixed interest rates for long period.

Whether shall you opt for fixed cum floating rate loans at this point of time?  Do let us know your views and suggestions in the comment section below.