Saving account made more interesting by Reserve Bank of India norms

In a uniquely Indian compromise, the computer industry had to actually strip out some of the abilities of their PCs (and those PCs would compare extremely unfavourably with a child’s PC today) and they coined a quaint name for these machines — Advanced Ledger Posting Machines. The trade unions consented to the use of these machines. Over time, the march of technology just overtook all the opposition and today, it would be difficult to spot a bank branch that’s not fully computerised and connected to a centralised system.

Why I am being nostalgic? 
Well the lack of computers spawned some systems that somehow survived the onslaught of computers in the late 90s and the first decade of this century. Among them was the practice of calculating interest on savings bank account on the minimum balance between the 10th and the end of the month. This was necessary since it would have been impossible to manually calculate the interest based on the daily balance system for the tens of millions of savings bank accounts with the banks.

Somehow, this practice persisted despite the vanishing of constraints that had created this practice in the first place. 
Kudos to RBI, then, for removing these last vestiges of an old-world system. This change makes a bigger difference than we may think.
Refer Bank account 1. Under the daily reducing basis method, the product is divided by the number of days (30 in this case) to get the average balance. It is on this amount that interest is paid. Hence,Rs 774,300/30 = Rs 25,810 as average balance. Interest @ 3.5% for 30 days on the amount = Rs 74.25.

This big jump (more than double) comes from Rs 33 under the old method. If that does not sound substantial, multiply that by 12 months and the millions of savings bank accounts, and you get a rough idea of the money savers have been losing so far. In fact, just one entry where the saver receives a sum from say, his trading account and within 3 days, pays it back to the broker, triples the interest payable from the old system ( See bank account 2).
Clearly, the days where savers who maintained large balances in their savings account bought liquid mutual funds to enhance returns are now past.

With daily reducing interest available on the savings bank balance itself, this will become the most convenient way to keep short-term large money. Also, short-term deposits (7-30 days) that yield hardly 2-3% will either vanish or see their rates harden beyond 3.50% at least. Even large entities may open savings bank accounts to get some return on their short-term liquidity.

Retail investors will be able to apply for public offerings without losing interest. “Application Supported by Blocked Amount”
(ASBA), will be more profitable as on the blocked amount, the interest will be paid on a daily basis, making applying less expensive.

There will be more cheer if the government emulates the RBI and changes some of its own archaic rules. Say for PPF accounts, the interest is payable on the minimum balance between the 5th of the month and the end of the month (I have always wondered which bureaucrat invented the date of 5th instead of the 10th that was always being used by the banking industry).

The reason this change has to be made by the government is because although the money is deposited with specified banks, it belongs to the government under the scheme.

To sum, the Reserve Bank needs to be applauded. Now, if you plan your withdrawals methodically, you will earn a better return on money kept in the savings account.

The writer is CEO, Apna Paisa, a price comparison engine for loans, insurance and investments. 
He can be reached at hrdna@apnapaisa.com

Source:dnaindia