SAVINGS BANK ACCOUNT INTEREST

SAVINGS BANK ACCOUNT INTEREST CALCULATION-UNDERSTANDING OF NEW METHODOLOGY :-

(“INTEREST”ING ISSUES)

This article aims at understanding the knowledge of savings bank accounts along with
its features and also attempts to explain the way of calculating interest under new
methodology which will come into effective from April, 2010. Also , it makes an analysis how
the new system is having advantage over the other in terms of “INTEREST PROFIT”.

Firstly, it looks on introduction to Savings Bank Account, its features and thereby
explains the methodology of calculating interest under current scenario. Then, it tries to give
some of the facts and figures to support for new methodology adopted. Lastly, it will explain
the new methodology with an example and concludes by mentioning the deviated benefits
a customer will get from it.

SAVINGS BANK ACCOUNT-INTRODUCTION AND FEATURES:-

As it is nevertheless to mention, Deposits and Loans are the main sources of Income
for any commercial bank. Banks accept Deposits and lends the same to the needy section
for some charge of interest. Of Course, they required to pay interest on the deposits which
they recover from Loan Interests. The margin can be the Bank’s Profit or Income ..
( generally it is called as “ SURPLUS”).Investors keep their funds with banks in the form of
deposits for security, safety and return which otherwise will be kept idle .

Any person , who is competent to contract , can open a savings bank account in the
bank.Ofcourse, the present generation banks are even allowing the minors to operate the
accounts if they have completed an age of 14 years and having the powers to understand
and discretion. The Minimum balance will be determined by the bank and it varies.
A person can open SB A/c in his own name or in the name of othes provided there is a
proper Introduction and also compliance of KYC ( Know Your Customer) norms.

The general features of any SB account can be drafted in the following points:

A Minimum balance to be maintained ( Varies from bank to bank)

Proper Introduction is required for opening. If it is not possible, account opening is at the
discretion of the bank
Account can be operated by depositing cash, withdrawing of cash, Clearing of
cheques ( Deposits and Payments),making fixed deposits from Account, making Demand
Drafts and Pay Orders from account etc.
Pass Book and cheque book will be issued to know the details of the account and to
transact with bank respectively.
If SB account is not operated for a period of 6 months or more(as per Guide Lines of
RBI), it will be taken as a “ DORMANT ACCOUNT” , which needs reinstatement by the bank
for make it operated and also attracts some service charge for non operation.
A Minor can open an account if he is guarded by a guardian appointed by Law.
Minimum balance ( Monthly or Quarterly) as prescribed the bank should be maintained
failing which it attracts some penalty. ATM card will be provided to withdraw money from

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 SAVINGS BANK ACCOUNT INTEREST

any where (from any bank’s ATM if the service providers mention it like VISA,MASTERCARD
etc.) Banks will allow to debit the savings account of the customers on a regular basis for
carrying the standing instructions requested by them like Insurance Premium Payments,ECS
etc.
A customer can close his SB account at any time by giving a letter requesting the
same and surrendering his Cheque Book,Pass Book and ATM card (If any).
All savings accounts will earn an Interest @ 3.5 % p.a. or 0.29% per month (i.e.,3.5/12) on the
minimum balance which kept in account from 10th of the month to the last day of month.

The last point mentioned got our attention here. A person who keeps a huge balance
in his SB account upto 10th of the month but incidentally a payment was made thereby
getting the balance reduced has to forego the interest on the opening balance and will get
the interest on the minimum balance from 10th to last day of the month.

This clearly indicates that the methodology of calculating interest is to be changed to

benefit the customers so that they also earn some good return on their investments. First , we
understand the methodology that is adopting now for calculating interest on SB accounts.

METHODOLOGY OF CALCULATING INTEREST ( AT CURRENT)

Assume Mr. Ramesh , a salaried employee in a Private Company,New Delhi is having

a SB account with Canara Bank. His Pass book for the month of April 2009 revealed the
following facts.

DATE DEPOSITS WITHDRAWALS BAL

01/04 30000 30000
10/04 20000 50000
30/04 40000 10000

From the above, Mr. Ramesh will get Rs.29.16 as Interest on his SB account for the month of
April 2009 and shown as follows.

Minimum Balance from 10th to 30th April Rs.10000

Interest amount is 10000*3.5/100*1/12 = 29.16

FACTS AND FIGURES UNDER OLD METHOLODGY:

According to RBI statistical review, March 2005, it can be inferred that 320 million
savings bank accounts attributing to 69% of total number of different types
( Current,savings and term) of deposit accounts and majority of such depositors are by and
large small holders.

“ The total deposits amounted to Rs. 4,72,147 crores forming 26% of total deposits of the
commercial banks.The savings bank deposits of INDIVIDUALS amounted to Rs.3,64,869 crores
77% of total savings bank deposits.” - STASTICAL REVIEW,2006

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 SAVINGS BANK ACCOUNT INTEREST

These savings bank deposits are remunerated at 3.5% p.a. but the effective rate was
just 2.8% only.This is because of the manner in which the commercial banks are calculating
the interest. Interestingly, banks will charge interest on the overdraft made by the customer
for one day also.

So, there should be a new methodology needed for giving the investors valid return on their
investments.

INITIATION OF NEW METHODOLOGY:

With same example…

Balance from 1/04 to 10/04 for 9 days= 30000*3.5/100*9/365 = Rs. 25.89

Balance from 10/04 to 30/04 for 20 days = 50000*3.5/100*20/365 = Rs.95.89
Balance on 10000*3.5/100*1/365 = 0 .95
Total interest amounted to Rs. 122.73
which is 4 times than old one ( Rs. 25.89 + 95.89 + 0.95)

So, the new methodology of savings account interest calculation will make the saving
holders more rich and a double interest you can earn on your savings deposits.

Dipak