CHEERS: NO LONGER NON-PERFORMING PERIOD ON SAVING BANK ACCOUNT.

[C.A. DEV KUMAR KOTHARI]

Non-performing period (NPP):

In this write-up NPP means the period for which an asset or say an individual has not performed and earned income. For example, when a professional take complete rest and do not work at all to earn such period will be NPP for him.

Saving bank accounts no real interest earned:

In saving bank account we are usually allowed very low interest @3.5% per annum. Furthermore, as explained in next paragraph, till 31.03.2010 the interest was not allowed for the entire period during which money was kept in saving account. However, from 01.04.2010 the method should be changed by banks, as directed by RBI.

In case of saving bank accounts, interest is credited only twice in a whole year at interval of six months this is also in vogue for quite a long period. Whereas in case of loans and overdraft, bank charges interest on monthly basis. Thus there is monthly compounding.

Considering inflation, lower rate of interest, and longer periodicity of compounding, it can be said that there is no real interest earned in saving bank accounts. For example, suppose you earned 3.5% interest on minimum balance basis, whereas it comes to say about 2- 2.5% on daily basis. After considering inflation of say 6% there is no real interest earned, rather there is loss due to lower purchasing power of the money which you withdraw along with interest. 

Saving Bank Account and NPP:

In case of saving bank account till 31.03.2010 there was proportionately longer NPP period because interest on saving bank account was calculated on the minimum balance in any saving bank account during the period of 11th day to the last day of the month (28,29,30 or 31 as the case may be). Therefore, any withdrawal of money during this period reduced interest earning, and any deposit during this period did not earn any interest. Therefore, suppose a sum of Rs.50000 was withdrawn on 30th day of the month, the account holder was not allowed any interest on the balance which he might have maintained from 1-29th day of the month. Similarly suppose he deposited on 11th of the day Rs.50000, he was not entitled to earn interest on this money even if it was maintained till last day of the month.

Cheers:

Discarding the very old method of interest calculation on minimum balance during 11the to last day of any month, the Reserve Bank has instructed banks to calculating interest payable on savings bank accounts on a daily balance basis from April 1. 2010. Thus, banks will have to calculate products for each days balance and calculate interest.

There is however, no change in rate of interest and periodicity of crediting interest in saving bank accounts.

This change will reduce NPP and enable higher interest though interest rates remain unchanged. This will induce people to keep money in bank accounts. Earlier, due to NPP, people were not induced to deposit money during NPP. For example suppose A withdrew a sum of Rs.15000 on 11the day to help out his friend B.B returned money on 14th , A was not induced to deposit the money in his bank account because of NPP. Instead of depositing money on 14th he kept money with him for use in next month. Now with no longer NPP, A will have some inducement to deposit money in Bank on say 14the or 15th and then withdraw money for next month on say 5-6th day. By depositing Rs.15000 on 14th day, he can earn interest on this money also for 20 days.

Depending on NPP in any case the additional income on saving account holders may be around 20-40% for any month. It is estimated that banks will be required to pay about 15-20 per cent more to saving bank account holders.

Extra cost to banks will be compensated:

As per press reports according to some bankers, the new system will result into higher interest payouts and may even result in a slight rise in the cost of funds. However, as discussed in earlier paragraph, due to total absence of NPP or in other words balance in saving account earning interest for each day, there will be higher average deposits in saving bank accounts. People who used to delay deposits or withdraw money early will now be more careful in their financial matters to earn interest by avoiding NPP by holding cash or cheques in hand. It is expected that due to change in policy, the overall balance in saving bank accounts will increase by at least 30-40%. Saving bank account is still the cheapest source of funds for banks. Therefore, banks should advertise and educate the saving bank account holders to take full advantage of the new system of crediting interest in saving bank accounts.

Time allowed to banks:

The RBI had announced this in the April 2009 and had given time to all banks to get their IT infrastructure in place for a smooth transition to the new system. RBI advised that payment of interest on savings accounts may be made by banks on a daily product basis with effect from April 1,2010" in a notification, which also asked banks to ensure a smooth transition and work out the modalities in this regard. It is hoped that all banks will follow the instructions of the RBI, though the instructions appears to be advisory in nature.

Benefit of Change:

Once daily balance method is adopted the earning will improve though the rate of interest, remains unchanged @ 3.5 per cent per annum.

For example, an individual has a paycheck of say Rs 50,000, which is credited to his account on the first of every month. Assume Nil balance in the account at the start of the month, deposit is made for the paycheck and he withdraws Rs 25,000 on the 5th of the month. So, the available balance on the 10th of the month will be Rs 25,000. Then there is a withdrawal of Rs 10,000 on the 20th of the month for some contingency.

The balance on the 10th of the month is Rs 25,000. There is a reduction in the account balance by Rs 10,000 on 20th day of the month. Hence, for calculating interest only Rs 15,000 is considered and interest for the month will be Rs 43.75 say Rs.44.

Under the new method taking the month of 30 days, there will be interest credited as follows:

on Rs 50,000 for five days (1st to 5th of the month),

on Rs 25,000 for 15 days (5th to the 20th of the month),

on Rs 15,000 for 10 days (20th to the 30th of the month).

Therefore, the total interest earned on various available balances will amount to Rs 75, higher than what is earned as per the present norm.

Similarly if there is a deposit of say Rs 15,000 on the 25th of the month - this will also be eligible for interest for five days in the new method. If we go by the current norms, there will be no change in the interest, that is the interest earned will be around Rs 44. This is due to the reason that the deposit made after 10th day does not impact the lowest balance figure between the 10th and the end of the month so the total interest received stands at Rs 43.75.

Old method was not justified:

Old method of computing interest on saving bank accounts was not justified. Interest calculation tables, calculators and then computers helped in calculating interest on loans and overdraft accounts. Periodicity of computing interest on loans, advances including overdraft accounts was changed to monthly rest about 8-10 years ago from quarterly basis. Therefore, it cannot be said that old system of allowing interest on saving bank accounts was justified due to difficulty in calculating interest. The RBI should have intervened in the matter long ago.

Very high bank charges due to lower

balance in saving account:

A related aspect is levy of bank charges due to lower quarterly average balance (LQAB). For example, ICICI bank has requirement of maintaining minimum quarterly average balance of Rs. 5000/- failing which a charge of Rs.750 is levied for any quarter. Suppose an account holder had average balance of Rs.4000/- thus there was short fall of Rs.1000/- for three months. The account holder has already suffered because he is allowed interest only on actual balance. For a shortfall of Rs.1000/- for three months levy of bank charges of Rs.750/- for lower MQAB is totally unjustified.

Illustration on MQAB:

Let us take hypothetical cases as illustrations:

Suppose the account holder A has maintained just Rs.5000 on average basis he would not be levied any bank charge.

Another Account holder B did not maintain any average balance (a/c being nil balance account) the bank charges Rs.750/-

On average Rs.5000 the bank would pay interest @ 3.5%, suppose bank on an average earn interest @ 8.5%, then there is spread of 5% pa. For Rs. 5000 for three months bank would earn Rs.62.50 only. Therefore, charging penalty for MQAB at Rs.750 is not at all justified. The RBI should also intervene in this regard.