It is safe to assume that India is in the midst of a banking revolution, the likes of which has never been seen before in the country.
The World Bank estimated that up to the year 2014, the penetration of banks in all segments of India increased from 35% in 2010 to 53% in 2014. When the ruling political parties at the Centre changed in 2014 and the present Government floated its Jan DhanYojana Scheme, a further proliferation of savings bank accounts took place. The scheme aimed at financial inclusion for all classes and masses of society – and by January 2015, over 125 million new bank accounts had been opened.
The implications for more savings bank accounts and interest to be earned on them are tremendous. It would appear that savings account holders can keep their idle finds idle for longer periods of time and earn interest on them, so as to increase the size of the deposit. Today, a majority of nationalised and private Indian banks offer 4% interest on savings deposits. However, people are also choosing other avenues of increasing the size of their savings instead of merely depending on 4% annualised interest rate returns.
How the interest used to be calculated before year 2010
Prior to the year 2010, interest on saving account was calculated on the basis of the lowest available deposit amount in the savings account. The savings account interest rate was calculated at 4% for the days from the 10th of the month to the final day of that month. The prominent condition on this interest rate calculation was that any money deposited into the account during this month was not considered for the computation, but withdrawals were counted. Thus, one would need to deposit money before the 10th of every month only, to bulk up the deposited amount and thus earn more money by way of the 4% interest.
Let us understand this with an example:
Interior designer Rupesh Kumar* gets paid on and off for consulting on various building projects. Suppose Rupesh’s opening balance on the 10th day of the month was Rs 30,000. On the 15th day, he received a payment of Rs 40,000. The account balance now stands at Rs 70,000. But on the 25th day of the month, he made a prepayment of Rs 50,000 towards his home loan. The account balance is now Rs 20,000. So the bank would calculate interest on saving account at 4% on Rs 20,000 thus leaving Rupesh with Rs 800 interest per annum.
How the interest is calculated post-year 2010
In the year 2010, from April 1 to be precise, the RBI mandated that banks rework their computations forinterest on saving account. Thus, banks started calculating the interest on a daily account basis. Let us once again use the example of Rupesh Kumar to illustrate the calculation:
Say Rupesh has an opening balance of Rs30,000 on the 10th day of the month. On the 15th day, he was paid Rs 40,000 by a client. So the bank calculates interest on the deposit from the 10th to the 15th day. On the 25th of the month, Rupesh makes a prepayment of Rs 50,000 on his home loan. Thus, the bank computes interest on the balance from the 15th to the 25th day. Finally, it calculates the interest on the balance between the 25thday to the final day of the month. This way, every Rupee in Rupesh’s account earns interest and there is no need to time money deposits.
Larger returns on savings bank accounts
After the RBI deregulated the 4% cap on savings account interest rates in India in October 2011, Indian banks were free to impose their preferred interest rates on savings deposits. Today, while most banks have stuck to 4% interest rates, some other banks in India offer up to 6% or even 7% interest on savings account.
Naturally, banks are keen to entice customers to open savings bank accounts with them, but they are also encouraging customers to maintain their deposits over a longer spell of time to earn higher interest on them. Premier banking institutions in India are also offering ‘Sweep in/Sweep out’ accounts which provide the benefits of larger deposits in the form of fixed deposits, but which can be liquidated in times of need. These accounts make it possible to earn decent sums of money by way of savings account interest.
The need for greater inclusivity
But while banks offer higher interest on savings accounts, the two-fold problem of getting more people to open savings accounts and then to deposit money in them arises. It is untrue that banks spend less on products offered to different categories of customers; for instance, it takes the same cost to sell a fixed deposit product to a person investing Rs 15,000 as it does to a person investing Rs 2,00,000. However, the needs of the rural and poor unbanked population are quite different, and hence, the savings account interest rates are a crucial factor for these customers. The rural poor are keen to invest small sums of money daily or weekly, and the daily balance interest stipulation is more valuable to them. But cutting down operating costs to cater to a wide rural customer base is the next step in Indian banking operations.
Significantly, new age banks and even some established players are taking great strides in the Indian rural banking sector with doorstep services, micro ATMs, zero balance savings accounts and funding for village based businesses and industries. Rural women are also being encouraged to get into the entrepreneurial space with their own community-based businesses.