Depositors to get better rates on savings accounts

Depositors are tipped to earn better returns on bank savings accounts in the future with Reserve Bank of India (RBI) having altered the
calculation of interest earned on such deposits.

In its annual policy statement for FY10, RBI has instructed banks to calculate the interest on savings bank accounts on a daily basis. Currently, banks calculate the interest based on the minimum balance held in savings accounts from the tenth to the last day of each calendar month.

Since interest is paid only on the minimum balance, the effective return to the depositor works out to around 2.9%, way below RBI’s mandated 3.5% rate. Once banks start offering interest on the balance maintained on a daily basis, the effective return will increase to between 3.25% and 3.5%, a banker said.

Calculation on a daily basis would be effective from April 2010 and the modalities would be worked out in consultation with banks. Addressing the media, RBI governor D Subbarao described the move as a depositor-friendly measure.

For bankers though, the new calculation will imply a higher cost of funds. “The cost will go up by 25-50 basis points. However, it will vary from one bank to another,” said A C Mahajan, CMD, Canara Bank.

Senior bankers say that the salaried class and pensioners would benefit the most by RBI’s move. Bank officials say that private lenders, which have a large number of salaried accounts in their portfolios, could witness a partial rise in their cost of funds.

RBI, in its credit policy document said, “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.

The matter was referred to the IBA, which was of the view that payment of interest on a daily product basis would be feasible only when computerisation in banks is completed.”

Some bankers have raised issues related to structural rigidity on interest rates in the system. “Returns on reverse repo — surplus funds parked by banks with RBI — will be 3.25%, while the interest rate that banks are required to pay depositors on savings account is 3.5%. There is an anomaly in this which needs to be corrected ,” pointed KC Chakrabarty, CMD, Punjab National Bank.

The share of savings deposits in total deposits was 24%, or around Rs 35.48 lakh crore, as of end-December 2008, according to RBI data.