RBI allows banks to increase frequency of interest payment

The Reserve Bank of India (RBI) has given commercial banks the option to pay interest on savings and term deposits at intervals less than three months, in a move to help banks woo depositors more aggressively.

The RBI move, announced in a notification today, will entitle deposit holders to earn a bit more as the interest is calculated on a compound basis, ie, adding interest to the principal amount.

Currently, banks calculate interest on a quarterly basis for deposits. Some of them make monthly payment, but they pay a little less after discounting their losses for early payment. ''For example, if quarterly interest is Rs300, they do not pay Rs100 a month to depositors for three months. They pay a little less on monthly basis,'' RBI noted.

Savings and term deposits are traditionally considered as the cheapest sources of funds for lenders, but have of late been struggling to raise deposits from the public.

Increasing the frequency of interest payment 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.

Bank deposits grew 15.45 per cent year-on-year to around Rs74,00,000 crore for the fortnight ended 16 November.

RBI governor Raghuram Rajan had, however, said he was not happy with the deposit growth.

RBI also granted banks the option to pay interest rates on rupee deposits held in `Domestic, Ordinary Non-Resident (NRO), Non-Resident Special Rupee (NRSR) and Non-Resident (External) (NRE) accounts at intervals shorter than a quarter.

As regard FCNR(B) deposits, the existing guidelines issued in this regard will remain unchanged, RBI said, adding that all other instructions in this regard, as amended from time to time, will remain unchanged.

RBI had, on 14 August 2013, allowed banks the freedom to offer interest rates on incremental NRE deposits with maturity of 3 years and above without any ceiling in order to pass on the benefit of exemption provided on such deposits from CRR/ SLR requirements. These instructions are valid up to 30 November 2013, subject to review.