Change Announced In Interest Rates On Savings

Banks used to give interest of 3.5 per cent on savings accounts on the basis of the least deposit in an account between the 10th and the last day of each month a decade ago.

In 2011, the central bank had decided to give freedom to commercial banks to fix savings bank deposit rates, the last bastion of the regulated interest-rate regime. While giving banks this freedom, RBI had said a uniform rate will have to be offered on deposits of up to Rs. 1 lakh.

Now  Reserve Bank has asked banks to pay interest on savings banks account on quarterly basis or shorter duration, a move which will benefit crores of savings account holders though the impact will not be significant .

At present, the interest is credited in savings bank account on half-yearly basis. Interest rate on savings bank account is calculated on daily basis since April 1, 2010.

“Interest on savings deposit shall be credited at quarterly or shorter intervals (on domestic savings deposits),” RBI said in a master circular issued on March 3.

While public sector banks offer 4 per cent interest on savings deposit, private players offer as much as 6 per cent.

Banks are however required to ensure uniform rate of interest on amount upto Rs.1.00 lakh. On higher amounts, banks are allowed to offer differential rates to depositors.

It is roughly estimated that the lower periodicity of interest payment may put a burden of Rs. 500 crore on banks.

If we cosider the impact on a bank by change in policy of payment from half yearly to quarterly, bank will have to pay approximately Rs.20.00 crore per year extra on a corpus of Rs.1.00 lac crore in savings deposit .

So far as depositors are concerned, a person depositing Rs.1.00 lac and keeping it for one year in the bank, will get additional interest of about Rs.20 in a year by change in periodicity of Payment of Interest on Savings Deposits from Half Yearly Basis to Quarterly Basis.

As such impact of change in periodicity of payment of interest , neither customers will be highly benefitted, nor banks will face significant impact on their balance sheet or profitability.

Change in policy will however enable banks to draw correct quarterly balance sheet . Earlier, these banks used to make rough provisions towards payment of interest on Savings Deposit held in their banks. Now they can draw clear picture branch wise too so that they may assess the profitability of each branch . In this way , banks can depict true picture of a branch as well as that of the bank in its entirety.

Impact of Change In Policy

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18-March-2016 20:58 IST

Interest Rates on various Small Savings Schemes for the 1st Quarter of 2016-17 notified;. Additional Interest Rate spreads which the Government allows on Small Savings Schemes like PPF, Senior Citizen Savings Scheme, Sukanya Samridhi Scheme and NSC etc. are being continued and included in the rates notified today.

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From the year 2012-13, the interest rates on various Small Savings Schemes (SSS) are recalculated and notified in the month of March every year.  These rates are applicable for the next financial year.  This is being done in line with the recommendations of the Shyamala Gopinath Committee to ensure that the interest rates of Small Savings Schemes are market linked.

Accordingly, as done in the previous years, the interest rates for various Small Savings Schemes were due for recalculation in March 2016.  As notified on 16^th February, 2016, instead of annual resetting of interest rates for the next financial year, the interest rates from now on will be reset every quarter based on the G-Sec yields of the previous three months. Consequently, the interest rates for various Small Savings Schemes were recalculated with reference to the G-Sec yields of equivalent maturity for the months December 2015 to February 2016.  Based on this calculation, the interest rates on various Small Savings Schemes for the 1^st quarter of 2016-17 have been notified today. The rates of interest on various small savings schemes for the First Quarter of Financial Year 2016-17, on the basis of the interest compounding/payment built-in in the schemes, shall be as under:

Instrument	Rate of interest w.e.f. 01.04.2015 to 31.3.2016	Rate of interest w.e.f. 01.04.2016 to 30.6.2016
Savings Deposit	4.0	4.0
1 Year Time Deposit	8.4	7.1
2 Year Time Deposit	8.4	7.2
3 Year Time Deposit	8.4	7.4
5 Year Time Deposit	8.5	7.9
5 Year Recurring Deposit	8.4	7.4
5 Year Senior Citizens Savings Scheme	9.3	8.6
5 year Monthly Income Account Scheme	8.4	7.8
5 Year National Savings Certificate	8.5	8.1
Public Provident Fund Scheme	8.7	8.1
Kisan Vikas Patra	8.7	7.8 (will mature in 110 months)
Sukanya Samriddhi Account Scheme	9.2	8.6

  This is a formula driven process. 

Further, as notified earlier, the additional interest rate spreads which the Government allows on Small Savings Schemes like PPF, Senior Citizen Savings Scheme, Sukanya Samridhi Scheme, NSC etc. are being continued.  The additional spread for these Schemes are 25 basis points for PPF, 100 basis points for Senior Citizen Savings Scheme, 75 basis points for Sukanya Samridhi Scheme, 25 basis points for five year time deposit, 25 basis points for National Savings Certificate and 25 basis points for Monthly Income Scheme. These additional interest rate spreads are being continued and are included in the rates notified today.

The quarterly revision of interest rates will ensure that the interest rates under Small Savings Schemes are more dynamically related to the current market rates, thereby enabling the Banks to move their interest rates in line with current money market rates.