How do banks calculate interest on your savings bank account ?

The Annual Review of RBI Monetary Policy on 21st April 2009 touched one important aspect that is calculation of Interest on amount kept by you in your Savings Bank account with the Bank. The RBI has directed the banks to calculate the interest on daily balance. Now the banks are offering 3.50% interest on your balances kept in your Savings Bank account. But the calculation of interest reduces the effective interest paid by the bank to you. The banks calculate interest on the minimum balance between 10th and last day of the month. And this interest is paid to you twice in a year once in February (for the period from August to January) and in August ( for the period from February to July). The example below tells you how the banks calculate the interest; Bank: ABC Bank Account Holder : Mr.X Account Number : 12345 Date Balance 01.08.08 Rs.5000 08.08.08 Rs.25000 12.08.08 Rs.200000 19.08.08 Rs.150000 21.08.08 Rs.50000 28.08.08 Rs.3000 So for the month of August interest will be Minimum balance between 10th and 31st will be Rs.3000 So, Principle X Rate of Interest X Days -------------------------------------------------- Days in a year X 100 = 3000 X 3.50 X 31 ------------------------ 36500 = Rs.8.91 If the interest is calculated on daily balance as directed by RBI, interest will be 01.08.08 tl 07.08.08 = 6 days X Rs.5000 =30000 08.08.08 to 11.08.08= 4 days X Rs.25000 = 100000 12.08.08 to 18.08.08= 6 days X 200000 = 1200000 19.08.08 to 20.08.08 = 2 days X 150000 = 300000 21.08.08 to 28.08.08 = 7 days X 50000 = 350000 29.08.08 to 31.08.08 = 3 days X 3000 = 9000 Total Product 1989000 for 31 days So, 1989000 X 3.50 -------------------------- 36500 = Rs.190.72 See the huge difference for just one month. The major beneficiary will be the customer as he will get interest for variations in balance through out the month. Earlier, banks were taking the minimum balance between 10th and last day, whatever the large amounts you have deposited between 10th and withdrawn subsequently before last day was not earning you anything. But now you get interest on that balance also. But the bankers will be worried as they have to fork out high interest on your deposit