DAILY INTEREST CALCULATION FOR SAVINGS BANK ACCOUNT HOLDERS

In Banking, Current updates on March 31, 2010 at 2:17 pm

From tomorrow as per RBIs guidelines, all savings bank accounts will yield daily interest for the balance kept in the account at the end of the day even though the applicable rate is 3.5 % , the banks had their own rule of calculating the balances for interest calculation and it makes an effective rate which might vary between 2.8-2.95 %, since most of the savings account shows higher balance in the first week, which banks will not consider for interest calculation . Now with this new rule, the banks will calculate the balance (principal) for interest daily average balance will be taken, so that at any point of time the customer gets 3.5 %. This will definitely hit the bottom-line of banks, because so far, the low-cost fund mobilizing by the banks were from current accounts ( CA ) and Savings account ( SA), and every retail banker will be running behind the customer to maintain balances in savings account. Now, the same will continue, but the banks will be in a situation to pay more interest to the customers.( instead of 2.9 % now they need to pay 3.5% ), so net profits may take a dip , depending on the banks dependencies on savings book. The other factor which have impact in the banking industry is the short-term deposits from 7 days-15 days,45 days. Currently the banks are giving somewhere about 2.5 %- 3% for these deposits, where in keeping money in savings account will earn 50 bps more than the deposit. So, except for corporate parking in short-term deposits, HNI & UHNI, who used to park temporary cash, will prefer to keep it in savings account. But I have heard few shrewd bankers have found a way to market for these low-cost funds( compared to FDs). They have arrived at a calculation ( which only they know ), and projected to clients stating that instead of fixed deposits, they can keep money in Savings account, which will earn them more than FD rates. which is not gonna happen. If that is the case, the whole world will keep money in savings account than FD( and ppl know how painful is to make/withdraw FDs from nationalized banks ), Retail bankers are increasingly betting their better cousins in investment bank, in identifying new ways to deceive clients Example of how the new system will work : For instance, an individual who earns Rs 50,000, which is credited to his account on the first of every month. Assume the existing balance in the account at the start of the month was zero. From the salary received, he withdraws Rs 25,000 for various household expenses on the 5th of the month. So, the available balance on the 10th of the month will be Rs 25,000. Assuming there is no regular payment to the account but a withdrawal of Rs 10,000 is likely on the 20th of the month for some expense that may arise. According to the present norm of calculating interest for savings account The balance on the 10th of the month is Rs 25,000. There is a reduction in the account balance by Rs 10,000 by the 20th of the month. Hence, the balance used for calculating interest is Rs 15,000 and the interest for the month will be Rs 44.

By the new daily balance method, there will be a minute look at the changes that have taken place and hence there will be a different method for the calculation. Lets assume a month of 30 days, there will be interest paid on Rs 50,000 for five days (1st to 5th of the month), then on Rs 25,000 for 15 days (5th to the 20th of the month) and lastly, on Rs 15,000 for 10 days (20th to the 30th of the month). Therefore, the total interest earned on various available balances will amount to Rs 75, higher than what is earned as per the present norm.

Now consider the same case, where instead of a withdrawal towards the end of the month, there is a deposit of Rs 15,000 on the 25th of the month due to interest received on a fixed deposit. If we go by the current norms, there will be no change in the interest, that is the interest earned will be around Rs 44. The reason: The deposit does not impact the lowest balance figure between the 10th and the end of the month so the total interest received stands at Rs 43.75. The daily interest method will compute interest on Rs 50,000 for 5 days, Rs 25,000 for 15 days, Rs 15,000 for 5 days (20th to 25th of the month) and then Rs 30,000 for 5 days (25th to 30th of the month, as the deposit was made on the 25th). So, in this case, the total interest earned will be Rs 82 for the month, almost double of what is earned by the old method.