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If you are keeping your funds in a basic savings account in Singapore, it’s probable that you’re only earning the bank’s base interest rate of 0.05% per annum (p.a.). Yet, the same bank might offer higher interest rates of above 3% p.a. on its other types of savings products, such as fixed deposits or high-interest savings accounts. Similarly, the same bank might also charge you increasingly higher lending rates on your mortgage loans and credit card charges. This, however, is reflective of the rise in global and domestic interest rates over the past two years post-Covid-19 as central banks hiked interest rates to tame inflation. The only exception to this trend is the base interest rate on basic savings accounts, which has largely lagged behind Singapore’s . Given that currency and deposits make up of a Singapore household’s assets in 4Q2023, it’s important to know as a saver where to keep your money. First, let’s understand why banks pay us interest on our savings. Banks rely on customer deposits as a source of funding to carry out their banking activities of providing loans and making investments. They attract customers to keep their funds with them by offering a savings rate. In other words, you’re essentially loaning money to the bank and receiving interest based on the savings rate for that loan. The savings rate offered by an individual bank is a reflection of its desire for additional deposits or to retain the existing deposits that it has. The interest on deposits typically comprises a base interest rate along with a variable bonus interest rate on selected savings products. Naturally, with the persistently high inflation rate and rising domestic interest rates, we might wonder why the base interest rates have remained unchanged at 0.05% p.a. Aside from the lower return, we are also losing the purchasing value of our funds held with the bank. In essence, while we may retain the same dollar amount in our savings account, what we can purchase with it may have decreased. Since the financial crisis in 2009 till April 2022, global interest rates were held at a record low level, with the Singapore Overnight Rate Average (SORA) averaging between 0.01% and 2.00%. This reduced the banks’ Net Interest Margin (NIM), which is the difference in interest earned on loans versus the amount of interest paid on deposits. In other words, the banks earned a smaller profit on the loans that they issued pre-covid 19. With interest rates rising starkly from 2022, banks were able to increase their lending rates on the loans that they issued. This consequently increased their NIM or revenue. Additionally, Singapore banks also saw an increase in bank deposits, even as more savers switched to higher yielding instruments like Singapore Government Securities (SGS) bonds and Singapore Savings Bonds (SSBs). For instance, the three major banks all reported an increase in customer deposits in FY2023. DBS saw a 3% increase to , OCBC experienced a 4% growth to , and UOB’s customer deposits expanded by 5% to . Another indication of the higher deposits can be gleaned from the recent announcement by the on 1 April 2024, which increased the Deposit Insurance (DI) limit from $75,000 to $100,000 per depositor per bank to ensure that 91% of depositors are fully covered. It previously raised the DI limit in April 2019 to maintain coverage levels. As such, banks have little incentive to raise their costs, namely the base savings rate, unless a specific need for deposits arises. With substantial deposits at their disposal and subdued loan demand, there is limited pressure on banks to increase the savings rate. However, a low saving rate may not necessarily be a bad thing for Singaporeans, particularly, if you’re an HDB flat buyer who qualifies for the HDB home loan. Compared to housing loans offered by financial institutions, which may vary based on market conditions, the concessionary interest rate on the HDB housing loan uses a more stable reference point. It is pegged at 0.1%-point above the prevailing CPF Ordinary Account (OA) interest rate, which is reviewed quarterly. In turn, the interest rate for CPF OA, which is currently set at 2.5% p.a., is computed based on the three-month average of major local banks’ interest rates, subjected to the legislated minimum rate. The formula comprises 80% of the interest rates for 12-month fixed deposit accounts, and 20% of the interest rates for savings accounts, which stands at 0.66%. Source: Having a lower deposit savings rate enables the HDB concessionary loan rate to remain stable at 2.6% p.a., benefiting future and existing homebuyers who want to finance their HDB flat purchase. That said, it’s not all lost cause for savers. At the end of the day, you need a bank savings account to manage your transactional balances, including facilitating the receipt of payments such as salaries and government payouts, as well as the convenient settlement of bills and expenses. However, in the eyes of the bank, such a savings account may hold a lower marginal value for their bottomline after factoring in the operational and regulatory costs of providing the service. Generally, these accounts might be used by young savers or seniors who may not only prefer a no-frills approach but are also likely to keep their money dormant with the banks. As these depositors are less likely to withdraw their savings or close the account due to the low interest rates, established banks would likely continue to hold the base interest rates at the current low level of 0.05%. Alternatively, you could consider high-interest savings accounts that require you to credit your salary, perform other transactions, such as credit card spending, or take up home mortgages with the bank. These transactions generate higher revenues for banks, enabling them to pay higher bonus rates. Another possibility is digital banks in Singapore. These banks typically offer higher savings rates due to the cost savings from lower operational costs. Furthermore, due to their relatively shorter establishment, there is a greater need for deposits to sustain their operations, which also attracts a higher savings rate. While these options are useful if you have transactional needs for the funds in the bank account, you could also consider switching to fixed deposits, including those offered by or other high-interest-bearing instruments like SGS bonds or SSBs, for your long-term saving needs. At the end of the day, as individuals, we must take charge of our own finances. This may require us to be attuned to the latest interest rates and investment products that may suit our needs and risk appetite. Leaving a large sum of our money dormant in a basic savings account could be detrimental to growing our personal net worth. The deadly combo of low interest rates and high inflation would result in our money losing value faster over time. Making a simple switch to a high-interest-bearing savings account might be a simple step in ensuring we are making our money work harder for us.