RBI has changed the method by which banks calculate the 3.5 % interest rate they charge on savings bank deposits

This shall be applicable with effect from April 1, 2010.
This note comments on a point in the credit policy that has not got the attention it deserves. The RBI has changed the method by which banks calculate the 3.5 % interest rate they charge on savings bank deposits. This seemingly innocuous change has far reaching ramifications for bank bottom lines. Bank bottom lines will fall by as much as Rs 18000 crores because of this.
>From paying the interest on the lowest balance recorded from the 10th to the 30th of the month, banks will have to pay daily interest on the daily balances at 3.5%. This will result in a 25 to 50 basis point increase in the cost of savings bank funds according to the chairman of the Canara Bank.
Consider the simple example that follows:
I open an SB account with Rs 100 on January 1. Then I deposit Rs 100,000 on January 2 as I need to make (say) a mutual fund investment. The amount stays in my account till January 25, then leaves to go to the mutual fund. That leaves Rs 100 in my account on January 26. Previously I earned interest on this Rs 100 as that was the lowest amount in my bank account in the period from Jan 10 to Jan 31. Now the bank will have to pay me interest on Rs 100,000 for the period from Jan 2 to Jan 25. !!!
As mentioned, this will result in a 25 to 50 basis point increase in the cost of funds in savings banks, according to the chairman of the Canara Bank. Now there are 36 LAKH CRORES in savings accounts in India according to the RBI.
That means banks net interest margins (and consequently profits) will reduce by Rs 9000 crores EVEN if we take the impact at the lower 25 basis points. At 50 bps, the impact is 18000 crores.
Savers benefit by this amount and banks lose by this amount.

2 comments:

ramjee said...

With this decision, I feel the movement of funds into liquid and short term funds may see a dip, as here the interest is certain and fixed.May be the Banks will declare fall in profit in the next year, which investors in Bank stocks should take into account.

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