Tit-Bits:Payment of Interest on Savings Bank Account on a Daily Product Basis – windfall to ePayments

  Payment of Interest on Savings Bank Account on a Daily Product Basis – windfall to ePayments.

A safe and easy way to save your money is with a bank savings account.  A bank savings account allows you to deposit money (add money to your account) or withdraw money (remove money from your account) at any time.  In return for keeping your money at the bank, the bank pays you money, also known as interest.

Interest will be earned on the money you have on deposit at the bank.  Since you may deposit or withdraw money each day, the bank will calculate how much money you should receive in interest.  You will also receive a periodic statement from the bank listing your deposits, withdrawals, interest, and account balances.  

 At present, in our county, interest on savings bank accounts is calculated on the minimum balances held in the accounts during the period from the 10th day to the last day of each calendar month. Several banks have suggested that interest on savings bank accounts may be calculated either on the minimum balances in the deposit accounts during the period from the first to the last day of each calendar month or on a daily product basis. 

Some Banks have also opined, that the Interest Rate Structure on Saving Bank Accounts, be de-regulated. However, Reserve Bank of India is not in favor of de-regulation. The de-regulation, would have led, to severe competition amongst the Banks. Few Banks, would have offered, a higher rate of interest, but would have set-off their interest losses, by levying service charges

          As a compromise, IBA opined, shifting to the international norm of payment of Interest, on Daily Balances. However, this could be possible, only after massive computerization of the Banking Industry.

           Now, that the Banking Industry, is computerized, to a very large extent, Reserve Bank of India, vide its notification RBI/2008-09/452,DBOD. No. Dir. BC.128/13.03.00/2008-09, dated April 24, 2009, advised Banks to Pay Interest on Savings Bank Account on a Daily Product Basis.

         The above rule will be effective from 01/04/2010. The full notification can be accessed at http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=4949&Mode=0

  At present, the interest (3.5 per cent per annum) is calculated on the minimum balance held in the account from the 10th of each month to the last day of that month. So, if a bank customer has Rs 1 lakh in his savings account one day and then Rs 100 another day, the minimum balance taken for calculation of interest in the period would be Rs 100. This system, is suited, when the Interest Calculations, are done manually.

But, from April 1, 2010, the interest paid on the savings account will be on the daily minimum balance. Now even the Rs 1 lakh balance in the savings account will earn the customer interest for the number of days it was in SB.
The daily balance method adds each day’s closing balance for the whole calendar month leading to a total value say, P. The interest amount for the month then is P×3.5/36500, computed through one day’s interest on P at 3.5% p.a. This interest will be the same as that worked out based on the average balance of the month.

 

          The above step of Reserve Bank of India, will lead to more customers, to, park their funds in Savings Bank Accounts. More funds in Saving Bank Accounts mean more opportunities for ePayments to boom.