Savings Account balance to get more interest - on a daily balance basis.

Good news for those who depend on the savings bank account. Currently, your savings bank account balance earns interest @ 3.5% on the lowest balance maintained between the 10th and the last date of the month. It means that if you have Rs.1.01 Crore on the 2nd day and and on the last day, you withdraw Rs.1.00 crore (leaving Rs.1 lakh in the account), you will get interest on Rs.1 lakh for that month. Now, wef 1-Apr-2010, your savings bank account will earn interest on the daily basis (based on your daily balances). So, the short term FD rates will also increase now. Only thing to be noted is that though the interest is calculated on the daily basis, it will be credited to your account on a quarterly basis.

This new mandate from RBI will earn upto 18% more for the savings bank investor. Following is the article from Times of India:

From Thursday, every rupee that you keep in your savings bank account will earn more money. According to a Reserve Bank of India (RBI) mandate, from April 1, banks will calculate interest paid on money kept in the savings bank account on a daily basis. This is a departure from the earlier practice of calculating interest on the lowest balance after the 10th of every month.

This change in calculation of interest paid on money kept in one's savings bank account, made possible by the use of technology in banking, will translate to about 16-18% higher earnings for the depositor, top bankers said. This means that if a person now earns around Rs 100 annually as interest income from his savings bank account, from the next financial year, the amount will jump to Rs 116-Rs 118.

There is a caveat though: although the interest will be calculated on a daily basis, it will be credited to the account only at the end of each quarter or the half year. Top bankers also pointed out that this new structure for interest calculation will force interest paid on ultra short-term fixed deposits, say for 15 days to 45 days, to go up substantially.

At present, the rate of interest in your savings bank account is 3.5% per annum as mandated by the government. But going by the current structure of calculating interest rate, the effective rate applicable to customers is about 2.90-2.95%, said Bipin Kabra, CFO, Dhanlaxmi Bank. In the new structure, this will be exactly 3.5%.

Since the RBI had announced to move to this structure one year ago--in its April 2009 policy meeting--all the banks got sufficient time to get their IT infrastructure ready. "All the test runs...dummy runs have been done. The technology has been tested to move to a system of daily calculation of interest (in savings bank)," said Seshan Ramakrishnan, head, retail liabilities product group, HDFC Bank. "Technology plays a huge role in this," he added.

The move to daily calculation of interest also has the potential to push up interest rate paid on very short-term FDs. This is because a number of banks pay just about 2.5-2.75% per annum on these FDs. But now that depositors can earn at least 3.5% in savings banks, and that too without any lock-in like in FDs, customers will have the freedom to arbitrage between the two types of deposits. "Savings bank accounts give liquidity, but here the interest income is credited at the end of the quarter or half year. On the other hand, in FDs, one could get the interest income at the end of term (that could be on the 46th day)," pointed out Ramakrishnan. "So it needs to be seen how customers behave under the new structure."

While account holders will earn some extra money, banks will be hit. Banks with a higher percentage of funds in their total liabilities coming from savings bank accounts would be affected more. According to balance sheet of banks for the year ended March 2009, SBI had 27% of its liabilities in savings bank accounts and HDFC Bank had 24%. Similarly, Axis Bank had 22%, Federal Bank had 20% and Dhanlaxmi Bank 15% in savings banks.


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