RBI allows banks to pay interest more frequently

              Triggering a potential deposit war among banks, the Reserve Bank of India on Friday gave commercial banks the option of paying interest on savings and term deposits at intervals less than three months. The RBI move, announced in a notification, is expected to make banks woo depositors more aggressively with a little extra interest payment.

               Interest calculated with shorter periodicity will yield a little higher sum in absolute term for savings account and term deposit holders. Public deposits traditionally are the cheapest source of funds for lenders, which have been struggling to raise money from common people. Bank deposits grew 15.45% year-on-year to around Rs 74-lakh crore for the fortnight ended November 16.

                   RBI Governor Raghuram Rajan, however, had said he is not happy with the deposit growth. "The most recent numbers have FCNR-B (foreign currency non-resident—bank deposits) in it. I would like to see deposits growth, especially CASA (current and saving account)," he had said.

               Increasing the frequency of interest payment — mentioned in the central bank's second quarter monetary policy in October — may put margin pressure on banks. Lenders have already been facing strains on their interest rate margins as they are compelled to pay high rates to depositors, while the government has directed them to lower lending rates.

                "Monthly interest payment on deposits will raise costs marginally, but it will help banks to woo customers with a little extra payment without raising deposit rates," KR Kamath, chairman and managing director at Punjab National Bank, had said at the time of the credit policy.

                   Currently, banks calculate interest on a quarterly basis for deposits. Some of them do make monthly payment, but they pay a little less after discounting their losses for early payment. For example, if quarterly interest is Rs 300, they do not pay Rs 100 a month to depositors for three months. They pay a little less on monthly basis.

Source : The Economic Times