The best savings product your bank offers is the one it advertises less

**Snigdha Sharma** (0:01)
When I first started saving regularly, the two options I was stuck between were fixed deposits and a savings account. Should I keep my money in a savings account so that I could access it whenever I need it? Or should I go for an FD so that it actually earns a decent interest? But what if I didn't have to choose at all?
You see, the RBI reports that at least 44% of Indians currently have their money sitting in savings accounts. In fact, as my colleague Inderpal Singh writes, Tamil Nadu's new Chief Minister, actor Vijay, is one of them. He has about 200 crore rupees just sitting in a savings account. And each of those accounts, including Vijay's, earns barely 2-3% a year. FDs, on the other hand, pay double or even triple that rate. But the moment you need to break that account early, you have to pay a penalty for it.
Turns out, there is actually a savings product with banks that's kind of a happy marriage between a savings account and an FD. And the surprising thing is, it's not even a new product. But still, not a lot of people have heard of it. To answer why, I'm going to be reading Inderpal's edition from one of the KEN's most popular subscriber-only newsletter called Kachin. And it's titled, The best savings product your bank's offer is the one it advertises less.
Welcome to Daybreak, a business podcast from the KEN. I'm your host, Rachel Varghese. And every day of the week, my co-host Snigdha Sharma and I will bring you one new story that is worth understanding and worth your time. Today is Monday, the 31st of August.
In May this year, when C. Joseph Vijay became the Chief Minister of Tamil Nadu, what left people gaping was not the unusualness of a movie star ascending to the state's highest office, but rather his wealth management choices. He declared total assets of 624 crore rupees to the election commission in March, with about 330 crore rupees of it held in bank deposits alone. In fact, more than 200 crore rupees sat in a single savings account at the Indian Overseas Bank's Salik Ramam branch in Chennai.
While Vijay might share very little with the common Indian, few of us are actors and far fewer are chief ministers, his money habits aren't too different from the rest of the country. Well, at least 44% of Indians. Nearly half of all individual bank deposits, as of March 26, currently sit in savings accounts, according to data from the Reserve Bank of India. 54% lie in term deposits, such as fixed deposit or FTs, and about 1% in current accounts. Now, money management is always a tug of war between greater liquidity and higher interest rates. Term deposits pull the rope towards better interest rates, but come with a penalty when money is withdrawn prematurely. On the other hand, a savings account has no closures or penalties, but offers embarrassingly low interest rates. A term deposit attracts an interest of 6-8%, while a savings account will only accrue 2-3%, and current accounts generate nothing. But sitting in the middle is a less known option that brings together the best of both worlds. A Flexi-FD or a Sweep-In-FD, as it is sometimes known. It's a type of bank account where cash deposited above a set minimum threshold is automatically transferred to an FT, which earns significantly higher interest rates that are on par with regular term deposits. The Flexi part of the deal comes from the option to withdraw any amount anytime without breaking the full FT or suffering a penalty. For instance, if the minimum threshold limit for an account is Rs 50,000, any amount above that, as laid out by the bank, will automatically be swept into an FT. And when an amount is withdrawn, say 25,000, the amount is broken from the Flexi-FD while the minimum threshold is maintained. But when I asked around, many people had not heard of Flexi-FDs, let alone opened one. If you're wondering why, the short answer is simple. Your bank doesn't want it to be too popular. And the long answer is, well, complex.
A back of the envelope calculation of CM Vijay's savings, if it were installed in a Flexi-FD, shows impressive results. Indian Overseas Bank pays about 2.25% per annum interest on savings deposits above Rs 1 lakh. On a 200-plus crore balance, over 5 years compounded quarterly, that earns a little over 25 crore rupees. It's decent until you see the alternative. The bank pays an interest of 6.5% for a one-year FD. The same amount deposited in a Flexi-FD at that rate compounds quarterly over the same tenure yields 81 crore rupees. The difference is nearly 56 crore rupees over 5 years, or roughly over 10 crore rupees a year. Now, Vijay, of course, is an extreme case, rich even by the standards of a politician. If you have a comparatively modest Rs 1 lakh sitting in your savings account, over 5 years, you would earn about Rs 13,000 in interest at a savings rate of 2.5% per annum. Move it to a Flexi-FD that keeps about Rs 50,000 as a liquid minimum balance, earning interest at 2.5%, and sweeps the remaining Rs 50,000 into a fixed deposit at 6.5%, compounded quarterly, and you walk away with about Rs 25,000 in total interest. That's nearly double what plain savings would earn. And the difference is close to Rs 12,000, just for keeping your money as liquid as before. And surprise surprise, banks don't like that. For all the money they spend advertising credit cards and home loans, Flexi-FDs don't seem to impress marketing teams as much. A credit manager at a leading private sector bank told me that there is an order in which banks like your money. Current accounts first, savings accounts second, term deposits third. Flexi-FDs come last. A Flexi-FD which combines the stickiness of a savings account with the interest rate of an FD is all pain, no gain for a bank's net interest margin. So making the product too popular is not in the bank's best interest, if you will forgive the pun. Then why do banks still keep offering them?