NEWS & ADVICE : FIXED DEPOSITS
The new avatar of savings account would earn you more money
By Neelima Shankar
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The day is nearing when savings bank accounts would start earning more for the depositor. As per the RBI mandate all banks are required to calculate interest on savings account on a daily basis from 1st April 2010. This would lead to an end of the era when interest on savings bank account used to be calculated on the lowest balance after the 10th day of each month.

This change in the way of interest calculation has been achievable by the use of technology in banking. Rapid growth of computerization in the sector has enabled banks to adapt to this new method.

The new method of interest calculation would earn the depositor about 16-18% higher earnings, top bankers said. A person now earning Rs. 100 from his savings account now will be earning Rs 116-118 using the new method of calculation.

The fissure in the issue lies in the fact that despite the interest being calculated on a daily basis it will be credited to the customer's account once every quarter or in a half year. It has been confirmed by top bankers that the interest on short term deposits ranging from 15 to 45 days would take a steep rise following the new method of calculation.

The current savings account rate is 3.5%. But the effective rate received by the customer is about 2.90-2.95%, said Bipin Kabra, CFO, Dhanlaxmi Bank. In the new structure, this will be exactly 3.5%.

This move by the RBI to calculate interest on daily basis for savings account is also likely to push up the rates on very short term FDs. Many banks pay only 2.5-2.75% on such FDs. Now if the customer would be gaining 3.5% on savings account he will not be interested in locking his money in FDs for a lesser rate.

"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), so it needs to be seen how customers behave under the new structure," quoted Seshan Ramakrishnan, head, retail liabilities product group, HDFC Bank.

The process will hit banks' margins while bringing cheers to the customers.


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