Home >Opinion >How 3.5% interest rate on savings can equal 0%

Then it was only a formula to be learnt to pass that exam. Now the formula tells me a story. A story of how regulators think and whose interest they serve. The way the savings bank interest rate has been calculated all these years is a statement of the regulator’s view of the relative importance of the depositor and the banker.

Why is the formula inherently unfair? Because it gives you the lowest rate possible, even though you may have an average balance that will be higher. In the worst-case scenario, the 3.5% deposit gets you zero. Assume that in a zero-balance world, you deposit Rs5 lakh on the 15th of a month and keep it there for the rest of the month. You think you will get some interest because the money sat in your account for 15 days. You do not. Because the minimum balance in your account from the 10th to the 15th is zero, that is the amount picked up to calculate the interest. But the bank had Rs5 lakh to use for the 15 days. The formula ensures that you get an unfair deal.

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Unless some banker can come and tell me how this is fair, we’ll go with the statement: The formula is unfair to customers and has been constructed to fund bank profits at the cost of small depositors, given that over 70% of total savings bank deposits belong to individuals. This will change in two weeks’ time, and it has taken the untiring efforts of K.J. Udeshi, former deputy governor of the Reserve Bank of India (RBI) and now chairperson of the Banking Codes and Standards Board of India, to make a difference.

Udeshi has been vocal about the unfairness of this system and has been fighting for a change ever since she took over the role of a formal representative of the depositors. “Regrettably, depositor interests have received low priority even from the government," she said in a 2007 speech on World Consumer Rights Day. Despite the push, it’s taken almost a decade since the issue was flagged for the regulator to actually make a change.

The reason clearly has been a recalcitrant banking sector and a regulator which has moved very slowly. When the issue was first flagged, the argument against a move to an average monthly rate (which is the global standard) was the lack of computerization in bank branches. But by 2009, that argument looked weak. A 24 April RBI circular advised banks that “in view of the present satisfactory level of computerization in commercial bank branches, it is proposed that payment of interest on savings bank accounts by scheduled commercial banks would be made on a daily product basis with effect from 1 April 2010".

The last year has seen banks still grabbing at whatever can be salvaged. First, they wanted the deadline to be pushed back, so that banks could “adjust". Then they asked for a reduction in the rate from 3.5%. Note the suggestion is not that the rate be freed, but that the rate be fixed and reduced. If the rates were to be freed, newer, hungrier banks would come in with higher deposit rates and disrupt the easy money that the incumbent banks have got used to. And finally, as the deadline of 1 April approaches, the real reason comes out: at a recent meeting with RBI, the banks requested the regulator to either reduce the savings bank rate or postpone the implementation. Reason: “It will affect our margins and profit," said the banks’ representative. There it is, out in the open. Banks want the unfair formula to continue to protect their profit margins.

1 April is just over two weeks away and Udeshi is not sure if the changeover will still happen. At a financial literacy workshop organized by Moneylife Foundation on International Women’s Day, she said: “We fought for it and RBI had agreed, and now, from 1st April, you’re likely to get 3.5%... Who knows they may even postpone it.

Banks will have to give interest on a daily basis and not the old system. Do you think banks have taken this quietly? Depositors are always at the receiving end. They (banks) get what they want and nobody writes about the depositors. And it is our savings and we never say a word."

Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and can be reached at

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