How are banks calculating interest on savings accounts?

by Manshu on January 25, 2012

in Fixed Deposits

Late last year RBI deregulated the interest rates on savings accounts and allowed banks to set their own rates. This resulted in banks raising their interest rates and creating two slabs of under a lakh and over a lakh.

For example, Yes Bank offers 6% on the saving bank balance of under Rs. 1 lakh and 7% on balances of over a lakh. Similarly, Kotak pays 5.5% for balances of less than a lakh and 6% on balances of over a lakh.

There were a few comments at the time asking about how interest will be calculated and if banks will take the lowest bank balance in a month to calculate that or something else like that.

I was reminded of this discussion when I came across a RBI notification that issues some clarifications on the way interest is calculated.

From reading the second point in there it’s quite clear that the banks will pay you the interest on the basis of your daily balance. So, they will see what your balance was at the end of the day and pay you interest based on that.

The second aspect of that is slightly unclear to me. I read it to understand that if you have a balance of Rs. 1,25,000 in your savings bank account at Yes Bank – they will pay you 6% for Rs. 1,00,000 and 7% for the Rs. 25,000 after that. They are not going to pay  you 7% for the whole amount, which is what I originally thought.

Does anyone have practical experience with this or knows for certain how this is going to be calculated? Please leave a comment or email me if you do as this is going to be of interest to a lot of people.

 

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{ 19 comments… read them below or add one }

Ibrahim Mirza January 26, 2012 at 11:04 pm

I doubted that the term “differential rate” means that the depositor will get lower rate for up to 1 lakh and any balance over will get the higher rate. So I checked with one of my friends who worked at a bank (in India) and he said that it is a simple formula where any balance above 1 lakh gets the higher rate. No tiering. Also, if RBI gives a directive on something like this it has to be sure the computer systems can handle it. When moving to the daily product method RBI had to ensure the systems can handle the new method. A 2 tier calculation means the banks system may have to change methodology on the software side.

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Manshu January 26, 2012 at 11:31 pm

Okay, so according to your friend – in this example entire 1.25 lakhs gets 7% right? That’ll be good if that’s case. This is certainly one place where I’d be happy to be wrong.

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bemoneyaware January 27, 2012 at 5:02 am

I did a post on how banks calculate the saving interest rate based on daily balance Saving Bank Account:Do you know how interest is calculated and more

Quoting from it:
If Savings bank account offers 4% interest per annum to the savers(Saving rates got deregulated on 25th Oct 2011 after that few banks revised their rates. ). The interest is calculated on the daily balance in your account. Let’s show it by an example

Say on 1st Aug Rs 70,000 is credited into your account. On 5th August after some withdrawls balance in your account is Rs 55000. You had Rs 70,000 for 4 days at 4% per annum. So how much interest did you earn? The formula is:
Interest = Principal or amount in the account * Number of days * Daily Interest Rate

Daily Interest Rate = Interest rate per annum /365 days
At 4% Daily Interest Rate is: 4%/365 = 0.010958%
So after plugging in the values the calculations are as follows:
When balance is 70,000 for 4 days = (70,000 * 4 * . 0.010958)/100 = 30.68
When balance is 55,000 for 4 days = (55000 * 4 * . 0.010958)/100 = 30.14

So my guess is it is based on balance amount. So 7% only on those days in which amount is over Rs 1,00,000.
I have an account in HDFC bank which hasn’t raised it’s interest :-(

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bemoneyaware January 27, 2012 at 5:12 am

Oops..in hurry did two mistakes:
1) Calculation : Second calculation is for 5 days and not 4 (Copy pase Ugh!)
When balance is 55,000 for 5 days = (55000 * 5 * . 0.010958)/100 = 30.14
2) Link to my post is Saving Bank Account:Do you know how interest is calculated and more

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Manshu January 27, 2012 at 11:55 pm

Thanks for the comment and the link.

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bemoneyaware January 28, 2012 at 3:46 am

Thanks for writing about such basics and giving a platform for sharing

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Nasim June 26, 2012 at 5:31 pm

Thanx Dear for clearing my concept

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bemoneyaware January 27, 2012 at 5:05 am

Outlook money had an article in Aug 2011 (which had inspired me to my post) It pays to strike the right balance which might help your readers

Note: At present, each bank follows its own schedule including monthly, quarterly and and half yearly for paying interest rates on savings accounts. The Reserve Bank of India(RBI) wants banks to pay the interest to depositors at a uniform period of three months

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Tripura S January 27, 2012 at 11:20 am

I recently tried to open an account with HDFC and their sales executive talks of a 6% interest rate on that account when the amount is over 1lakh. I received a call from the bank executive to confirm if I was informed correctly about the features. So the executive said that the account would receive a 4% interest rate until the balance is 1lakh. When the balance reaches 1.25lakhs, 25000 would be moved to an FD for 1 year and 1day at a higher interest rate.

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Manshu January 27, 2012 at 11:41 pm

Oh a FD, but what if you want to withdraw the money, shouldn’t they just give the high interest on 25k without blocking it for a year. That defeats the whole purpose really.

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CA Karan Batra February 9, 2012 at 12:25 am

@Manshu

I browsed throught the website of Yes Bank and what I understood from the facts stated was that they are paying 6% on deposits below 1L and 7% on deposits above 1 Lakh. So the example given by you in the above example is correct.

And this was something bound to happen – With RBI having deregulated the Interest Rates such differential rates were bound to happen to attract customers … Just like banks have the power to lend loans at different rates to different customers, now they also have the powers to pay different interest to different customers…

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Sarvesh Prajapati March 30, 2012 at 8:31 pm

Are banks calculating interest rates on daily basis?

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Manshu April 2, 2012 at 4:00 am

Yes from sometime last year they are doing this.

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Sarvesh Prajapati March 30, 2012 at 8:34 pm

Suppose I have deposidted Rs. 30000 in my Yes bank account on 1st Apr 2012 and the bank is offering 6% interest. Now at the end of April I would like to withdraw entire amount from the bank, then how much interest I would have earned?

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Manshu April 2, 2012 at 3:59 am

They will give you 6% annual for a month so about Rs. 150.

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NEETA April 15, 2012 at 2:39 pm

you will get Rs. 147.94 as interest

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lokesh reddy July 16, 2012 at 12:03 pm

plz help me in ths prblm

recently i go to bank i asked the interst rates they said that 11%
how can we calculate??
suppose the principle amount is 100000

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durga August 18, 2012 at 5:28 pm

How to calculate interest on savings account.

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Paresh August 18, 2012 at 11:35 pm

Looking for some info in this regard:
I have one account in cooperative bank and bank is not computerized..Bank have thousands of account holders..does any one know how they able to calculate interest on saving accounts on daily basis for thousands of accounts, without computers???

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