The Reserve Bank of India is toying with the idea of getting banks to credit interest into savings bank accounts at quarterly or shorter intervals.
If implemented, this would be yet another incremental step in the run up to the eventual deregulation of the interest rate on these deposits.
Currently, the RBI mandates crediting interest on savings bank (SB) deposits on quarterly or longer rests. Most banks are crediting interest on a half-yearly basis, with the exception of Axis Bank, which credits interest on a quarterly basis, said bankers.
Payment of interest on SB deposits at quarterly or shorter rests is one of the key points that will be discussed at a meeting of bankers at the RBI tomorrow.
Depositors will be a happy lot if the RBI formalises the move to get banks to credit interest on SB accounts at quarterly or monthly intervals. However, banks could see their costs going up further.
Incremental steps
Following persistent feedback that SB depositors were being short-changed, in the last one year, the RBI took a couple of incremental steps to turn the plain vanilla SB account attractive.
The central bank directed banks to pay interest on SB accounts on a daily product basis with effect from April 1, 2010. Further, the interest rate on SB accounts has been hiked from 3.5 per cent to 4 per cent (as per the RBI's Annual Policy announced on May 3, 2011). Consequently, banks' cost of deposits has gone up.
“There has been a demand from customers, especially senior citizens, to the effect that interest on SB deposits should be credited at shorter intervals, either quarterly or monthly. If the central bank implements the move, then banks' cost of deposits could go up slightly,” said Mr K.C. Jani, Executive Director, IDBI Bank.
Currently, SB deposits account for about a quarter of the banking system's aggregate deposits of Rs 53.16 lakh crore as on May 6, 2011.
“If interest is credited on a quarterly basis then the effective return for the deposit holder could increase to 4.06 per cent from the current 4 per cent. If interest is credited on a monthly basis, the effective interest rate could be around 4.12-4.13 per cent,” said Mr S. Govindan, General Manager, Union Bank of India.
For the customer this will mean better returns and also more incentive to keep larger balance in the savings bank accounts, he added.
RBI meeting with bankers
Besides SB deposits, the other points that will be discussed at the RBI meeting on Thursday include: feedback on RBI's annual monetary policy for 2011-12; the road ahead for implementation of Basel III (global regulatory standard on bank capital adequacy and liquidity) and the advanced approach to Basel II (framework for risk and capital management requirements).
Further, the meeting will also deliberate on convergence to the International Financial Reporting Standard; enhancement of provisions for non-performing assets and restructured accounts; branch expansion in un-banked centres and amortisation of additional pension liabilities of serving employees.