Thanks to the efforts of two enterprising financial consultants based in Indore, Mahesh Natani and Ajit Kumar Jain, millions of individuals with savings bank accounts will now earn substantial higher interest incomes every month. The Reserve Bank of India would, of course, like us to believe that it has “voluntarily” decided to help holders of savings bank accounts by directing all scheduled commercial banks in the country to compute the interest rate on such deposits daily and not on the basis of an antiquated 69-year-old system through which the interest rate used to be computed on the minimum balance that was maintained in an account between the tenth day and the last day of a calendar month. Here's the backdrop to the momentous decision of the RBI that would increase the interest income on deposits in savings bank accounts by fairly substantial proportions varying between 16 per cent and 50 per cent and in certain special cases, by as much as 200 per cent. This unexpected bonanza has accrued to many ordinary Indians after the RBI arrogantly dismissed the complaints made by Natani and Jain in a public interest litigation (PIL) petition that was filed in the Madhya Pradesh High Court.
In March 2007, Natani had written to the Finance Minister and the RBI Governor arguing that the manner in which banks computed the interest rate on deposits in savings bank accounts was blatantly unfair and biased against the account-holder whose funds could be deployed by banks to earn handsome profits. Even in the case of fixed deposits and loan accounts, banks would calculate the interest on fixed deposits on a quarterly basis while interest rates would be applied on all loan accounts on a monthly basis.
After the RBI referred the matter to the Indian Banks' Association (IBA), this body representing all banks in the country argued that payment of interest on a daily basis would be feasible only when all bank branches were computerized. The RBI initially argued that “most transactions in savings bank accounts take place during the first ten days of the month and thereafter, transactions become less frequent and balances remain stable” without mentioning how it had come to such a conclusion. The RBI also claimed that a “savings account, like a current account, provides the convenience of easy withdrawals, writing/collection of cheques and other payment facilities” and further that “while no interest is paid on current account (savings), interest is paid on savings bank accounts mainly to encourage savings and banking habits among the public” and hence, “interest on savings bank accounts is generally kept low (3.5 per cent per annum at present) and paid on stable balances”.
After the petition was filed by Natani and Jain, the High Court issued a notice to the RBI in April 2008. In August that year, the RBI replied to the notice justifying its practices to which the petitioners filed a counter-reply in October. Thereafter, the RBI had a sudden change of heart. In April 2009, the RBI “voluntarily” directed all scheduled commercial banks to start calculating interest on deposits in savings bank on a daily basis with effect from April 1, 2010. It was first proposed that the interest would be deposited half-yearly even if it was calculated on a daily basis. The period was then reduced to a quarter and finally, every month.
Banks are naturally unhappy since they had been paying an annual effective rate of interest on savings bank accounts that varied between 2.90 per cent and 2.95 per cent in most cases but are now having to pay exactly 3.5 per cent. The total additional financial burden on all banks put together will work out to an estimated Rs 8,000 crore during the current financial year. While banks are lobbying with the RBI to protect their profit margins by reducing interest rates on savings bank deposits, the central bank should not succumb to such pressures and continue to ensure that the “interest” of depositors is properly safeguarded.
(The writer is an educator and a journalist with 30 years' experience.)
This article was originally published on May 22, 2010.
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