Saturday, April 5, 2008

Banks are using outdated and faulty methods to pay interest

Almost every one has a savings account in the bank but most of us do not check our savings account how much interest gets credited into our account for the deposits we make.

And if we say how many of us know the way interest is calculated and credited into our account? Not many of us. The most surprising thing is crores of rupees are lost through millions of savings accounts in our country. The numbers as you will see are staggering.

There are an estimated 320 million savings accounts in the various commercial banks. As per the RBI report of May 2007, saving deposits with banks amounted to approximately Rs 4,30,000 crore (Rs 4,300 billion) at the end of March 2007.

The interest paid by most of the banks in the country is on the minimum balance held between the 10th and 30th/31st of every month. A report was prepared after picking up the samples from nationalized, private and foreign banks in the country to take a broad representation of most banks.

For instance you have nil balance in your account as on April 10. On April 11th you deposit Rs 100,000 in your account. If you withdraw the funds on May 31st, there is no interest paid to you for the entire term of 51 days.

You may think why, the reason according to the bank’s calculation is that the minimum balance between April 10 (nil) and April 30 (Rs 100,000) is nil, so no interest is paid for April. Similarly between May 10 (Rs 100,000) and May 31st (nil), the minimum balance is nil and hence you earn no interest for May as well.

Basically it gives the chance to the bank to use your money for 51 days free of cost. As a result, the bank has the advantage of leveraging these zero-cost funds and lends them at higher rates of interest. This is one of the most important sources of their profits.

At the same time a smart person will deposit Rs 100,000 on April 10th instead of April 11th and remove the money on May 1st. The minimum between April 10th and April 30th now is Rs 100,000 and hence he gets 3.5 per cent a year for just keeping the money for 20 days. This is equivalent to a yield of 5.425 per cent.

The RBI knows well aware of this but has done nothing about this practice. At the end of the day it’s the depositor who bears the burden of this faulty interest calculation practice.

The question to ask is that in the area of technological sophistication, is it necessary to continue with this outdated method of interest calculation for the convenience of banks but at the cost to the depositor? This shows that the aam admi’s interests like always clearly take a backseat.

Then what should be done to maximize the interest you earn on bank deposits?

Make deposits in your savings account before or on the 10th of every month and try to withdraw any funds only after the 31st or the last day of every month.

Check your bank statements carefully to ensure that interest payments are properly credited into your account.

More importantly leave minimum funds in your savings account to pay for monthly expenses and immediate payments and move the rest in short term fixed deposits.

This way you have liquidity and at the same time you continue to earn higher interest. It is better to save funds in higher interest rate fixed deposits and take an overdraft against the deposit for any unforeseen event.

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