How banks pay interest on your savings account balance - For understanding- One View

[Raman K]

This quick reply from my cousin, mr.Sivaswamy, with his routine tight schedule. He was in computerization etc. He is in project in a software company now. Given a good information.

K.Raman .

The Banks do earn Profit from the difference in the interest they pay and receive, charges for services they render, penalty the customers if they close the loan earlier and pay less when they close the deposit earlier than contracted period.

 

Interest Earned by the Bank by way of lending –

 

Banks do the calculations in the following methods.

 

Daily Balance -   On the daily balance, the interest will be accrued and applied at every month. (These are mainly done in Current Accounts.)

 

Monthly Average Balance -  The banks calculate interest on the Monthly average Balance and then charge the customer in the month end.

 

Quarterly Rests   -  The balance at the end of the quarter will be the interest base for the calculation of interest for the next quarter irrespective of transactions in the account.(Generally there will not be any further disbursement of loan in the same account)

 

Penalty Interest Earned by the Banks -  If the customer agrees to have the repayment done in say 36 months and if he wants to close the loan earlier than that, then the Bank apply penalty interest to compensate the interest lost it is going to incur because of early close.

 

 

 

Interest Paid by the Banks.

 

There are 2 types of deposits ie. Savings and Time deposits

 

In the savings deposits, the banks calculate the interest base on the monthly minimum balance method. i.e  the Bank will take the balance of the customer for the whole month and arrive at the minimum balance he maintained in that account for that month and apply interest on that.

 

Example:-

 

Date             balance                 Min Balance

1.1.2006       1,500.00                1500

5.1.2006       2,500.00                1500

10.1.2006     5,500.00                1500

27.1.2006     1,200.00                1200

30.1.2006       900.00                  900    

 

For the month of Jan 2006, they will calculate interest for 900 even though the balance was 5500 for nearly 17days between 10^th and 27^th.

 

 

Time Deposits

 

This is much tricky. The time deposits are offered on the term and amount matrix. It is something similar to excel work book where the x access will be term and y axis will be amount. Based on this the interest will be calculated.

 

Example

Term                                         0-15000             15k+1 to 15L     >15L

Less than 15 days                           2%               2.5%               3 %

16-90 days                                      2.5%            3%                  4%

 

If you invest 15000  for the period of 15 days you will earn interest at the rate of 2% and if it is between 16 to 90 days it will 2.5% and so on.

 

How they reduce the interest rate when the customer withdraws earlier than contracted period.

 

 

Suppose we invest 20L for 30 days, we should get the interest at the rate of 4%. If we try to close the deposit after 7 days we will be eligible for 3% of interest only. Moreover, the Bank will charge 1% as penalty for earlier closure of the deposit. However there is ruling by the RBI that the Principal can not be reduced from the customer when he closes earlier.

 

I did not have the time to draft this reply for you. I just went on typing, in between my schedule of things. So sorry for the bad hand.

 

With regards,

siva