Your salary account may earn 10-25% more interest

The cost of deposits for banks will increase by 10-20 basis points,depending on the share and pattern of the current and savings accounts (CASA) in their deposit base following the adoption of the daily average method,proposed by the Reserve Bank of India (RBI). Though this will not materially impact their profitability or lead to any significant change in the share of low-cost deposits (CASA) in the banking system,banks’ savings-account holders — especially the salaried class — will benefit from the new system.

The RBI has proposed that all scheduled commercial banks should start the computation of monthly interest on savings accounts on a daily basis with effect from April 1,2010,instead of the current method of linking the interest to the minimum balance between the tenth and last day of each month. “The new method of interest computation will increase the effective interest rate on savings balances,particularly for salary account holders. It is estimated that for a salary account holder with a minimum savings balance between 1-2 times of the monthly salary,the increase in interest income will be between 10 and 25 per cent,” Crisil said.

The higher interest outgo on savings accounts will increase the cost of deposits for banks. However,Crisil believes that the impact of this increase will be limited due to the existing low interest rate on savings at 3.5 per cent and the relatively low share of savings deposits,varying between 15 and 25 per cent,in the overall deposit base of the banks. Assuming that the entire savings balances for the banks are transaction intensive,the overall increase in the cost of deposits for banks will be between 10 and 20 bps. The impact of the new method for the calculation of interest on the individual banks will however depend on the mix of the savings accounts,that is,the share of transaction intensive vis-à-vis relatively dormant float accounts.