April 13 : If you have a savings bank account, have you checked your passbook recently? If the answer to this question is “no”, then do so, for you may be in for a pleasant surprise. You will find that your interest income will soon be going up even if the extra amount that you would now be
earning will get credited to your account only at the end of the month. By the end of April, you would notice that the actual amount you have earned by way of interest income on the deposits in your savings bank account would have risen fairly substantially — by a proportion that could vary from a low of 16 per cent to 50 per cent to as high as 200 per cent in certain cases.
For this unexpected bonanza, millions of ordinary citizens who have kept their money in savings bank accounts should be especially grateful to two not-so-well-known financial consultants based in Indore, Mahesh Natani and Ajit Kumar Jain. While the country’s Central bank and apex monetary authority, the Reserve Bank of India (RBI), initially sought to dismiss the complaints made by these two individuals and even sought to derogatorily describe them as “laymen” without any “expertise” in the complex subject of interest rate calculation, the RBI had to eventually bite the dust and eat humble pie by “voluntarily” agreeing to precisely what these two men had demanded in a public interest litigation petition filed in the Madhya Pradesh high court.
The story begins on March 22, 2007, when Mr Natani wrote to the finance minister and the RBI Governor complaining about the blatantly “unfair” method used by banks in the country to calculate the interest on deposits in savings accounts by deploying a 69-year-old system wherein the interest rate was computed on the minimum balance that was maintained in an account between the 10th day and the last day of a calendar month. For example, if a person deposits, say, Rs 50,000 on January 1 and withdraws Rs 45,000 on January 28, the interest rate would be calculated on Rs 5,000 although the bank would have been able to utilise Rs 45,000 for a period of 28 days and earned handsome returns by loaning the amount at relatively much higher interest rates.
Similar double standards were applied by banks while computing the interest on fixed deposits and loan accounts — banks would calculate the interest on fixed deposits on a quarterly basis while interest rates would be applied on all loan accounts on a monthly basis. Clearly, such practices were discriminatory as far as depositor is concerned, which is exactly what Mr Natani and his friend Mr Jain had pointed out. The RBI referred the subject to the Indian Banks’ Association (IBA) — the body that represents all scheduled commercial banks in the country — that justified this unfair practice on the specious plea that payment of interest on a daily basis would be feasible only when all bank branches were computerised.
The RBI’s initial response was peculiar to say the least. It argued that “most transactions in savings bank accounts take place during the first 10 days of the month and thereafter, transactions become less frequent and balances remain stable” without mentioning how the RBI had arrived at such a conclusion. Thereafter, the RBI claimed that a “savings account, like a current account, provides the convenience of easy withdrawals, writing/collection of cheques and other payment facilities” and further that “while no interest is paid on current account (savings), interest is paid on savings bank accounts mainly to encourage savings and banking habits among the public” and, hence, “interest on savings bank accounts is generally kept low (3.5 per cent per annum at present) and paid on stable balances”.
Unimpressed with such arguments, Mr Natani and Mr Jain moved the Madhya Pradesh high court which issued a notice to the RBI on April 16, 2008. In August, the RBI replied to the notice justifying its practices of computing interest rates to which the petitioners filed a counter-reply in October. Soon thereafter, the RBI presumably realised that it was trying to defend the indefensible. On April 21, 2009, in its annual monetary and credit policy statement, the RBI directed all scheduled commercial banks to start calculating interest on deposits in savings banks on a daily basis, with effect from April 1, 2010. In this respect too, the RBI dilly-dallied a bit. First it was proposed that the interest would be deposited half-yearly even if it was calculated on a daily basis. The period was then reduced to a quarter and finally, every month.
Banks are naturally unhappy. Banks had actually been paying an annual effective rate of interest on savings bank accounts that varied between 2.90 per cent and 2.95 per cent in most cases but are now having to pay exactly 3.5 per cent. The total additional financial burden on all banks put together will work out to an estimated Rs 8,000 crores during the current financial year, of which the burden on the country’s largest bank, the State Bank of India, alone would be around Rs 1,200 crores. These are the amounts that would henceforth go straight into the coffers of savings bank account holders.
On February 11, the lobby of bankers led by the current IBA head M.V. Nair, who happens to be the chairman and managing director of Union Bank of India, argued before the RBI’s deputy governor Usha Thorat that the RBI should reduce the interest rates applicable to deposits in savings bank accounts to protect their profit margins. Mr Nair pointed out that for banks, their cost of deposits would go up by around 80 basis points (or 0.8 per cent) on account of the new system of calculating the interest rate. Mr Natani says banks are all waiting for the end of April to ascertain the exact financial burden on them.
The bankers’ lobby has become active on the eve of the presentation of the forthcoming credit and monetary policy statement of the RBI on April 20. Having initially resisted the move towards calculating interest rates on a daily basis — as is the norm in many countries across the globe, especially developed nations — before “voluntarily” acceding to the new method of computing the interest rate, the RBI should now not succumb to pressures exerted on it by bank managements and uphold the “interest” (pun intended) of millions of small depositors who have parked their hard-earned savings in banks.
By Paranjoy Guha Thakurta
Paranjoy Guha Thakurta is an educator and commentator
