In India, we have seen many people withdrawing money or writing payment cheques after end of the month. It’s not hard to guess the reason - the method of interest calculation in savings bank account penalizes you I you withdraw the month after 10th of each month. It will calculate the interest on lower balance post 10th of each month.
On other hand, if we deposit any amount after 10th of any month, bank will not consider that amount for interest calculation. Hence, people love to get the payment on or before 10th and hesitate in making any payment before month end. In India, we love interest, whatever small amount it may be, we don't want to lose it.
Banks used to calculate interest on your savings account as per old fashion calculation. Let’s see, how did old method work?
Banks pay interest on the minimum balance held between the 10th and end of the month date every month. This puts you on trouble if you make a deposit after 10th or withdraw before month end. Let’s see an example, here is list of transactions:
- There was a balance of Rs 2,000 in account as on February 10th 2010.
- On February 11th there was a deposit Rs 2 Lakh in account.
- On 31st May there was a withdrawal of Rs 2 Lakh from account
In this case customer will be paid interest only on Rs 2,000 for the month of February and March 2010, Even though he has kept Rs 2 lakh with the bank for 48 days, he will not get any interest on that amount. He will get interest of Rs 13.33 for 2 months (Interest rate assumed 4 %).
RBI has changed the method of calculation. Now customer will be paid interest per day rather than per month. So continuing the about example, customer will get interest for following terms
- Interest from 1st Feb 2010 to 10th Feb 2010 on Rs 2000
- Interest from 11th Feb 2010 to 31st Mar 2010 on Rs 2,02,000
- Interest for 31st March on Rs 2000
Hence customer will get interest of Rs 686.67 for 2 months.
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