The critical question the financial system and RBI should address is whether the system should function to facilitate the bankers who enjoy free float or ordinary customers whose money is used freely. The computational difficulties suggested do not hold water anymore since core banking solutions provide enough tools to facilitate the computation. A passing observation by Reserve Bank of India (RBI) governor in the annual policy statement for 2009-2010 made on April 21, 2009, is important and reveals how the banking system is taking the common customer for a big ride in terms of making them lose a significant amount of interest from the savings bank accounts.
The governor says that “At present interest on savings bank accounts is calculated on the minimum balances held in the accounts during the period from the 10th day to the last day of each calendar month. Several banks have suggested that interest on savings bank accounts may be calculated either on the minimum balances in the deposit accounts during the period from the first to the last day or on a daily product basis. The matter was referred to the Indian Banks’ Association, which was of the view that payment of interest on a daily product basis would be feasible only when computerisation in commercial bank branches is completed. In view of the present satisfactory level of computerisation in commercial bank branches, it is proposed that payment of interest on savings bank accounts by scheduled commercial banks (SCBs) would be calculated on a daily product basis with effect from April 1, 2010. Modalities in this regard will be worked out in consultation with banks”.
The interesting point in this is regarding IBA insisting that payment of interest on savings account can be undertaken only after computerisation, but the same is not insisted upon for the current account where interest is collected from the overdraft account on a daily balance basis for a long time-even before computerisation.
Clearly, the aam aadmi is being made to suffer significantly.
For example, if you have Rs 1,000 on say on December 10 and deposit say Rs 1 lakh on December 11, and withdraw Rs 1 lakh on January 30, then you will get interest on only Rs 1,000 for the entire period of 51 days.
Similarly, if you deposit Rs 1,000 on say July 11 and withdraw it on August 31, then the bank enjoys the full amount of Rs 1,000 without paying any interest. You will get zero interest.
Smt Kishori J Udeshi, as chairperson of the Banking Codes and Standard Board of India (BCSBI) raised the issue in her lecture at a World Consumer Day function as early as 2007.
At that point of time (as of March 2005) savings bank deposits amounted to nearly 26 per cent of the total deposits of the scheduled commercial banks. Of this individuals had 77 per cent.
At that time the savings bank interest on the minimum balance basis was 3.5 per cent and the effective rate was as low as 2.8 per cent. The effective rate is actual interest paid in relation to account levels.
At present nearly 22 per cent of the deposits are savings bank accounts and 12 per cent are current accounts, according to the report of the RBI on the Trends and Progress of banking in India 2008-2009.
That the current account category does not get paid any interest is a separate issue. The savings account category was of the order of Rs 875,000 crore. The interest offered on minimum balance basis is 3.5 per cent and if the effective rate is 1 per cent less, then banks are denying an amount of nearly Rs 8,750 crore to the common man. It is important to note that maximum savings bank accounts are held by ordinary individuals and a substantial portion of them may not even know about the rip-off.
Not only that, the banks also desperately chase what are called current account and savings accounts (CASA) each year in order to augment their cheap source of funding.
The critical question the financial system and RBI should address is whether the system should function to facilitate the bankers who enjoy free float or ordinary customers whose money is used freely. The computational difficulties suggested do not hold water anymore since core banking solutions provide enough tools to facilitate the computation.
It is told that some banks are resisting to the switchover to the rational system of paying interest on a daily balance basis from first April 1, 2010, by providing all types of excuses. Nowhere in the world is such huge free float made available to the bankers at the cost of ordinary investors.
The RBI should insist on introducing interest computation on a daily balance basis on the savings account. The central bank has also to relook at the system of not providing interest on the credit balance kept at the current account when interest is charged on a daily basis as income to the bankers.
I think the time has come in the financial sphere wherein we must keep the ordinary customer as centre of things and not the bankers or their conveniences.
If we want to achieve financial inclusion, the elementary step is to provide interest to the Ram Singhs and Yellammas of the world, on the money they keep as savings account with the banker. They do not know about the subtleties of minimum balance and subterfuge of the sophisticated bankers. It is fascinating that bankers do not complain about the absence of computational tools when credit default swaps are discussed and interest rate derivatives are analysed.
But when it comes to the savings bank account of aam aadmi, the banker tries to bring any number of issues to deny what he rightfully owns.
One hopes the powerful banking lobby does not sabotage the April 1 deadline and make all the aam admi as fools as in the past.
(The writer is Professor of Finance at Indian Institute of Management, Bangalore and Indian Institute of Management, Bannerghatta Road, Bangalore.)