Monday, November 23, 2009

Interest on Savings Deposits

RBI proposal for interest rates on savings deposits will come to effect by next year. The key change is that interest will be calculated on daily balances method whereas currently interest rate is paid on the lowest balance between 10th and last day of the month.

Of course this is a good move beneficial to all those who keep balances in savings accounts and whose balances fluctuate a lot such that they may not be able to make term deposits.

But how will the banks absorb the additional cost? The most obvious way will be to reduce the term deposit interest rates. But this will affect all those who are solely dependent on interest income. Most of these category keep only nil or at most the minimum stipulated balance in savings accounts. For them loss of term deposit interest will be far more than the miniscule interest received from savings account balances.

This can be solved in a way which benefits all:

All savings holders should have an option to specify whether they want interest on savings accounts on daily basis or the present minimum balance basis. Banks can have term deposit interest rates as usual but for those opting for savings account interest rates on daily basis will get term deposit rate minus a certain mark down. Others will get both savings and term deposit interest as being done currently.

Thus cross subsidy can be eliminated so that no one is adversely affected: the bankers, the term deposit holders and those who keep most of the balances in savings accounts.

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