Daily interest calculation

THE CHANGE
The interest rate on savings accounts is to be paid on the average daily amount, rather than the minimum monthly sum. It was introduced on April 1.

THE INTENT
The aim was to increase the returns for accountholders. Savings account earns a 3.5% annual interest. Till March this year, it was being calculated on the minimum amount between 10th and end of the month, lowering the effective interest rate. Now, the interest is calculated on a daily basis.

THE IMPACT
Till March this year, most people believed that they were earning a 3.5% annual interest on the money in their savings bank accounts. They were oblivious to the fact that what they earned was much less than this. As the banks computed interest only on the minimum balance amount in the month, accountholders were earning only 2.8% interest.

"Inflation is in double digits. It makes the real rate of interest on savings accounts negative. So, are we not asking people to open bank accounts to get negative returns?" K.J. UDESHI Chairperson, Banking Codes and Standards Board of India

This glaring discrepancy had been noticeable for the past few years. In March 2007, on World Consumer Rights Day, K.J. Udeshi, chairperson of the Banking Codes and Standards Board of India, pointed out: "The manner of calculating interest on savings bank deposits is such that a part of these deposits is not given any interest." Since then, Udeshi, who is also a former RBI deputy governor, has been instrumental in pushing the customerfriendly reform.

Ever since the change was first proposed in 2007, the Indian Banks' Association had been opposing it. They did not believe it would be feasible until all banks were fully computerised and demanded that the rate of interest be reduced before the new formula was enforced.

However, the RBI set 1 April 2010 as the date for the transition and ensured that the deadline was adhered to by all banks.

The central bank is now considering deregulating the savings bank interest rate. Though this will expose the interest rate to fluctuations, banks are more worried that the rates will go up as competitors try to woo customers. So they are reluctant to accept this proposal.

Quick Cheque The speed clearing system ensures that the clearing of outstation cheques takes place within 48 hours under the 'local clearing' instead of the 7-14 days that it used to take earlier.

"The banks will never accept deregulation voluntarily, but it will have to be enforced. The RBI should also fix a minimum floor for the savings interest rate, so that the depositors are not worse off than what they are right now," says Udeshi.

"Inflation is in the double-digit range, turning the real rate of interest on savings accounts negative. When we say financial inclusion, are we not asking the poor to open bank accounts to get negative returns?" she asks. Thankfully, things shall change for the better.