Read Part I before reading this article.
Basically it implies that the bank gets to use your money for 51 days free of cost. Therefore, the banks have the option of leveraging these zero-cost funds and lend them at higher rates of interest. This is one of the most important sources of their profits.
At the same time a sharp cookie will deposit Rs 100,000 on April 10th instead of April 11th and remove the money on May 1st. The minimum between April 10th and April 30th now is Rs 100,000 and hence he gets 3.5 per cent a year for just keeping the money for 20 days. This is equivalent to a yield of 5.425 per cent.
The RBI is well aware of this but nothing has been done about this practice. At the end of the day it’s the depositor who bears the brunt of this faulty interest calculation practice.
The question to ask is that in the area of technological sophistication is it necessary to continue with this outdated method of interest calculation for the convenience of banks but at the cost to the depositor? This shows that the aam admi’s interests like always clearly take a backseat.
So what should you do to maximise the interest you earn on bank deposits?
- Make deposits in your savings account before or on the 10th of every month.
- Ensure that you withdraw any funds only after the 31st or the last day of every month.
- Check your bank statements carefully to ensure that interest payments are properly credited into your account.
- More importantly leave bare minimum funds in your savings account to pay for monthly expenses and immediate payments and move the rest in short term fixed deposits. This way you have liquidity and at the same time you continue to earn higher interest. Better yet, park funds in higher interest rate fixed deposits, and take an overdraft against the deposit for any contingencies.