NEW DELHI: IDFC First Bank has launched a monthly interest credit facility on all of its savings’ bank accounts. Effective 1 July, savings account interest will be credited on a monthly basis. As per Reserve Bank of India (RBI) regulations, banks credit interest to depositors’ accounts on a quarterly basis. However, 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 will help the depositors get access to the interest amount early rather than wait for the end of a quarter.
“…Crediting the interest monthly will help savings account holders earn interest on interest if they continue to keep the interest earned in the savings bank account or the customer can withdraw the interest money if they wish to for their expenses, EMIs etc,” said Amit Kumar, head – Retail Liabilities, IDFC First Bank.
However, increase in interest earnings due to compounding is likely to be marginal, say experts.
“Going with an average rate of interest of 3% on saving accounts, the benefit to savings account customers in IDFC First Bank will be of 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 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 while prior to this it was credited on a half yearly basis.
In the case of IDFC First Bank, interest interest will be credited on the 1st of every month to 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 savings account. If the balance in the account is less than Rs10 lakh, it will earn an interest of 4% per annum. 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, like a few others, has offering a higher interest rate on savings bank accounts. It was offering an interest rate of 7% per annum in 2020, but it has now been reduced to around 4% per annum.
The RBI deregulated interest rates on savings bank accounts in 2011. Prior to that, 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 Rs1 lakh, irrespective of the amount in the account within this limit. While for savings bank deposits over Rs1 lakh, a bank may provide differential rates of interest, if it chooses to.
Experts, however, feel that one should not park a significant sums of money in savings account lured by interest rates as banks are free to increase and decrease the rates. “I would encourage customers to evaluate fixed deposit propositions and to maintain minimal balances in savings accounts,” said Khosla.
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