This has assumed greater importance in the wake of a large number of banks cutting interest rates on savings accounts which means that unused funds lying idle in these will earn even less than before. This move by banks has brought the need to optimise the amount of funds kept in bank savings accounts into sharper focus.
Since October 2011, most banks barring few private banks were offering interest rate of 4 percent in these savings accounts. However, recently, banks have started reducing interest rate on savings account.
The first salvo was fired by none other than the country’s largest bank. On 31st July, 2017, State Bank of India slashed its interest rate on savings account deposits by 50 basis points to 3.5 per on balance of Rs 1 crore and below. Subsequently, eleven more banks have reduced the savings bank account interest rate and more could be expected to follow soon.
Here are some of the banks that have reduced rates from the earlier rate of 4 percent for most deposits.
Differentiating features in savings account
According to RBI rules, interest on savings account (for resident rupee accounts) shall be calculated on a daily basis and will be a uniform interest rate on balance up to Rs 1 lakh, irrespective of the amount in the account within this limit. Also, banks may offer differential rates of interest on balance above Rs 1 lakh.
Therefore, a bank may have a specific rate up to Rs 1 lakh, while a different rate for balance between Rs 1 lakh and Rs 50 lakh or Rs 1 crore. Some banks do not differentiate and may have a flat rate up to Rs 50 lakh or Rs 1 crore. Therefore, choose to go with a bank based on the average balance being maintained in your account.
The interest in the savings account of scheduled commercial banks is calculated on daily basis and is credited to the account on quarterly basis. The banks are allowed to credit interest at shorter interval too.
Banks may insist on maintenance of a monthly average balance (MAB). If the average is not maintained at the end of that period, there could be a penalty. As a savings bank account holder, one needs to keep an eye on the average balance limits as set by the bank. Some banks have a low limit of Rs 1,000 while some may have Rs 5,000.
In addition there could be several other differentiating features like a higher limit for free usage of ATM etc.
As the minimum balance requirement of bank savings account has to be met to avoid penalties therefore one should know how it is calculated in order to ensure that this requirement is met while optimising the amount of funds kept in a savings account.
Monthly Average Balance: Calculation
Here’s how to calculate the monthly average balance for bank savings accounts:
Say, a bank asks to maintain Rs 5,000 as monthly average balance.
Let’s say how MAB will be calculated for August.
On 1st August, the balance in the account is Rs 4,000
On 12th August, withdrawal of Rs 3,000 take place
On 18th August, deposit of Rs 9,000 takes place
From 1st August to 12th August i.e. 11 days, total balance will be Rs (4000*11) = Rs 44,000
From 12th August to 18th August, total balance will be Rs (1000*6) = Rs 6,000
From 18th August to 31st August, total balance will be Rs (10000*13) = Rs 1.3 lakh
So, total balance comes to Rs 1.8 lakh and the average for 31 days will be Rs 5,806, which is above the required limit and hence no penalty will be levied. For calculating the number of days, it is based on day’s closing balance.
Keeping idle funds in the savings account should be to take care of emergency needs. Most financial planners suggest keeping at least 6 months of household expense as emergency funds. One may keep an amount equal to three months of such needs in savings account and the rest in short term or liquid funds.
In order to reduce their cost of funds, banks have started offering lower interest rate in their savings account. As an account holder, it’s time for you to take an equally informed decision to divert funds from savings account to high yield investments to make your liquid money earn more.