Why did RBI Decide to Pay Interest on Saving Daily Basis? – 5 Reasons Behind this Decision

RBI has decided to pay interest to the saving account holder according to the daily balance in their saving account. I think, this decision is taken after calculating the effect of it on commercial banks overall return on earning. Following are main five reasons for providing more interest on saving.



1st Reason - To Increase the saving

In last year, according to RBI data,” only 25% of total deposits were collected under saving account due to low income of interest on saving. But all know that it is cheapest source of funds for commercial banks. RBI knows this point very clearly and ordered to pay interest on daily base.

2nd Reason – To Reduce the cost of Fund

This decision will reduce the cost of fund. When we talk about cost of fund, many expenditure will include in it. Advertising is one of them. After issuing this decision notification, we all know that we will receive more interest. Great and we are starting more investment in saving accounts of bank. This is free of cost advertising. After paying high interest, bank’s overall cost will reduce.

3rd Reason – Enjoy, no TDS on interest on saving

It will be useful for both banks and customers. Customers overall income will increase without any suffering of TDS. Customers will encourage from this decision and after depositing high money in short run, commercial banks’ health will become better.

4th Reason – To make system equal to Interest on Loan

Interest on loan was charging on daily base before 1st April 2010 (Ref. from friend) and after this decision, RBI is trying to make system equal to interest on loan.

5th Reason - High Difference between Effective Rate and Interest Rate on saving account

According to professor of finance at Indian Institute of Management, Bangalore

Commercial banks should earn only effective rate of 2.8% daily basis on saving account fund but, they are earning 3.5% which is still more.

He told that in previous system, commercial banks were fooling aam admi and he proved with following example: Clearly, the aam admi 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.

So, RBI decision will stop Subterfuge of commercial banks in India.