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IDFC First Bank had recently launched a monthly interest credit facility on all savings bank accounts (SBAs). From 1 July, interest on SBAs will be credited on a monthly basis.

As per Reserve Bank of India (RBI) regulations, banks credit interest to accounts of depositors every quarter, although they are free to credit it on a monthly basis.

In case of fixed deposits, various frequencies, including monthly, quarterly, annual and cumulative are offered by banks. But for savings accounts, banks have not historically given this flexibility.

Monthly credit of interest helps depositors get access to the interest amount early.

“As IDFC First Bank has always tried to introduce innovative solutions for its customers, this is another such benefit. Crediting interest every month will help savings account holders to earn interest on interest if they continue to keep the interest earned in such accounts. Also, customers can withdraw the interest money if they wish to to meet their expenses, EMIs, etc," said Amit Kumar, head, retail liabilities, IDFC First Bank.

However, the increase in interest earnings due to compounding is likely to be marginal, say experts.

“Going with an average rate of interest of 3% on savings accounts, the benefit to savings account customers in IDFC First Bank will be 0.0074% over and above the quarterly interest. Although the benefit is marginal at best, there is obviously some gain for depositors," said Raj Khosla, founder and managing director of MyMoneyMantra.com, a financial advisory firm.

As per RBI regulations, banks are supposed to calculate the interest on the end of the day balance. In March 2016, RBI directed banks to start crediting interest on savings accounts on a quarterly basis. Prior to this, it was credited on a half-yearly basis.

The interest earned in case of IDFC First Bank will be credited on the first date of every month to the savings bank account. There will be no change in the interest rate and other features of the account.

IDFC First Bank is offering an interest rate of 3-5% per annum, depending on the balance in the savings account. If the balance in the account is up to 1 lakh, it will earn an interest of 4% per annum, and if the balance is more than 1 lakh and up to 10 lakh, it will earn an interest of 4.5%. In case the balance is greater than 10 lakh but less than 2 crore, the bank will pay an interest of 5% per annum. In case the balance is more than 100 crore, it will earn an interest at the rate of 3% per annum.

In order to expand its customer base, IDFC First Bank has been among the few banks offering a higher interest rate on SBAs. It was offering an interest rate of 7% per annum in 2020, now the same has been reduced to around 4% per annum.

The RBI had deregulated the interest rates on SBAs in 2011. Prior to that, the interest rate was fixed at 4% by the RBI.

As per RBI guidelines, each bank will have to offer a uniform interest rate on savings bank deposits of up to 1 lakh, irrespective of the amount in the account within this limit. While for savings bank deposits over 1 lakh, a bank may provide differential rates of interest, if it chooses to.

However, experts feel that one should not park a higher sum of money in savings accounts lured by interest rates as the banks are free to increase and decrease the rates as per their will.

“I would encourage customers to evaluate fixed deposit propositions and to maintain minimal balances in savings accounts," said Khosla.

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