Why banks don't give interest on savings, deposits on monthly basis?

While the RBI has liberalised interest rates and given freedom to banks to fix interest rates and the periodicity of payment of interest to depositors, the reality is that banks are not willing to pass on the benefits of liberalization to the public unless they are forced to do so

During second quarterly review of monetary policy on 29 October 2013, the Reserve Bank of India (RBI) governor announced that it has been decided to give banks the option to pay interest on savings and term deposits at intervals shorter than quarterly intervals, thus raising hopes of a better return on your savings deposited with the bank.

What is the present system of payment of interest on SB and Term deposits?

Uptil now banks were required to pay interest on savings and term deposits at quarterly or longer intervals. In fact, all the commercial banks in the country have been paying interest on fixed deposits (FDs) uniformly only at quarterly intervals, which means the interest gets compounded quarterly, if it is accumulated with the principal and not paid to the depositors at the end of every quarter. However, banks do make monthly payment, but they pay a little less after discounting the interest for early payment. For example, if your quarterly interest is Rs300, you do not get Rs100 per month for three months but a little less than Rs100 each month after deducting the discount at the deposit rate for early payment. In the case of savings bank (SB) deposits, most of the banks have been paying interest at half-yearly intervals, while a few private banks are paying interest at quarterly intervals.

How does the new option of paying interest at shorter intervals affect banks?

The RBI’s new dispensation giving freedom to banks to pay interest at shorter than quarterly intervals will affect the banks to the extent that they have to shell out a little more interest to the depositors if they retain the same rate of interest as offered at present. It is felt by some banks that it may increase their cost of deposits marginally, though it might help banks to woo customers with a little extra payment without raising deposit rates. Due to this additional burden, however small it may be, there does not appear to be any enthusiasm on the part of the banks to shorten the interval to pay interest on SB and term deposits, going by the lukewarm response from the banks even after nearly four weeks of the announcement by the RBI. Syndicate Bank is the only bank to have indicated their intention to exercise the option to pay interest at monthly intervals and no other bank has come forward to follow suit so far.

How does it benefit bank customers, if interest is paid at shorter intervals?

Here is an example of how much it benefits banks customers if interest is paid at shorter intervals, which in effect means interest is compounded at different intervals.

Here is what you will get if interest at 10 % p.a. is paid at different intervals:

Interest Cycle

Amount invested

Interest earned

Equivalent Rate (AER)


Rs1 lakh




Rs1 lakh




Rs1 lakh




Rs1 lakh



It is clear from the above table that shorter the interval, better the rate of interest, provided the interest is allowed to be accumulated with principal at the same rate till maturity. The annual equivalent rate (AER) shows what percentage of interest you will earn on simple interest basis taking into account how often the interest is credited to the principal and what effect compounding will have on final interest payment. This measure allows you to compare how much you will earn on an account where interest is paid/compounded monthly as against where interest is paid annually.

What happened when SB interest rates were de-regulated by RBI?

When the RBI de-regulated the rate of interest on SB accounts with effect from 25 October 2011, it was expected that many banks may offer higher rates of interest than the then existing rate of 4% prevailing before the de-regulation. But it did not happen. None of the public sector banks has raised the SB interest rate, which continues to be 4% as before.
Except for a couple of small private banks, who offered a staggered rate of 5% and 7% on SB balances in excess of Rs1 lakh held in the accounts, none of the large banks both in the public and private sector offer higher interest rates on savings accounts even after two years of de-regulation of interest rates by RBI. This evidently shows the total reluctance on the part of large banks to offer better rates of interest for reasons of their own, to the disadvantage of the banking public.

Only last week, the newly licensed women’s bank, owned by the government, named as Bharatiya Mahila Bank has announced at its inauguration that they would offer interest at 4.5% p.a. on all SB accounts with balance up to Rs1 lakh and 5% p.a. on balances in excess of Rs1 lakh maintained in the account.

While the RBI has liberalized interest rates and given freedom to banks to fix interest rates and the periodicity of payment of interest to depositors with an intention to spur competition for the benefit of the banking public, the reality is that banks are not willing to pass on the benefits of liberalization to the public unless they are forced to do so. While there is no evidence of cartelization among banks in this regard, there is a herd mentality among banks to follow the bigger players, who are not keen to avail this option as they feel that reducing the interest payment interval could hike interest costs and affect their net interest margin.

How do the bank depositors get a raw deal from the banking system?

The bank depositors in this country have been getting a raw deal not only from the commercial banks, but also from the regulator and the government, who have been silent spectators to the suffering of the depositors due to the following reasons:

1. The inflation in terms of consumer price index (CPI) has been sky rocketing for the last two years and has now reached 10.09 % which is adversely affecting the life of the common man in this country. Against double digit inflation, the interest rates on bank deposits have not moved up and continue to be in single digits, resulting in erosion of savings of bank depositors as the real rate of return on bank fixed deposits has turned negative, while the interest rate on savings account continues to be a paltry 4% p.a.

2. As if to add insult to injury, the interest earned on bank deposits attract income tax at rates varying from 10% to 30% depending upon the income of the individual, which further erodes the return on bank deposits substantially, making life miserable for all those bank depositors/ senior citizens who depend on interest income only from bank deposits for their livelihood.

3. All banks charge interest on all their loans and advances at monthly intervals, which means the interest earned by them gets compounded every month, where as the interest paid on all deposits is compounded at quarterly intervals. This is a clear case of discrimination practiced by banks against bank depositors under the very nose of RBI.

4. Banking in our country is a one way street for the benefit of banks to the detriment of bank’s customers. While banks levy penalties very liberally for all delayed payments by all its customers, there is no penalty imposed on banks for their failure to comply with their part of obligations towards the customers. For instance, if you do not maintain the stipulated minimum balance in your account, banks levy a penalty, but, if the bank fails to credit the monthly pension or interest due to you on the appointed day due to whatever reasons, banks are not bound to pay any compensation to you. There are several such instances where banks levy penalties on customers, without having to shell out any penalty for their own lapses. A classic case of proverbial ‘heads I win, tails you lose’, as the customer loses both ways.

5. Due to the negative return on bank deposits, the hapless bank depositors, specially retirees and senior citizens, unable to make both ends meet, ventured to invest their hard earned savings in risky company deposits, chit funds and other ponzi schemes, which offered higher returns, but failed to return the principal on the due date. This resulted in untold misery and agony to a large number of investors, who had, with a view to get higher returns, diverted their bank deposits into these dubious investment schemes, for which the government and the regulators are equally reprehensible.

How can RBI help the depositors under these circumstances?

“I am not very happy with the deposit growth, I would like to see deposit growth, especially CASA,” RBI governor Dr Raghuram Rajan reported to have said recently on the poor growth of bank deposits. (CASA stands for Current Account and Savings Account in banking parlance.) If RBI wants to encourage deposit growth, they should veritably take the following initiatives:

Steps to be taken by RBI through issuing directives to banks:

1. The freedom given to the banks, especially in relation to rules governing deposit accounts has not served the purpose for which it was meant, as the depositors have not benefitted at all. RBI should, therefore, direct all banks to compound interest at intervals not longer than monthly intervals on all types of deposits, as they do on their lending portfolio.

2. RBI should direct that the rate of interest on SB deposits should have a relationship with the rate they offer on fixed deposits of one year tenure. For instance, if a bank offers interest of 8 % p.a. on their fixed deposit of one year tenure, the interest on SB deposits should not be lower than say 6 % p.a., which means the difference of interest between the two should not be more than 2 %. This will result in moving the SB interest rates in tandem with the fixed deposit rate, thereby benefiting the savers who prefer to retain their surplus funds in SB accounts to meet any emergency.

3. The RBI should direct the banks to continue with the practice of offering additional interest of 1 % p.a. over the standard rates on fixed deposits to all senior citizens, as prevailing earlier, which has since been reduced to half a percent by all banks, to enable them to lead a life of security in their sun set years. This step will go a long way in stopping diversion of bank deposits into risky ponzi schemes, which are thriving only because of low interest offered by banks to senior citizens and those who do not have enough savings to meet their daily needs in these days of galloping inflation.

4. RBI should come out with guidelines to provide compensation to customers, whenever banks fail to honour their commitments to customers. For instance, if a remittance through RTGS/NEFT is not credited to the beneficiary’s account within 24 hours of the remittance, banks should pay a compensation of Rs.100 per day’s delay without even asking for it by the remitter/beneficiary. Such compensation scheme should cover all services rendered by banks and should be made mandatory and paid without asking by the customer.

Steps to be taken by Central Government for which RBI to initiate action:

5. With effect from the financial year 2012-13, the interest earned on SB deposits is exempt from income tax only up to Rs.10,000/- per annum. This cap on tax exemption should be removed and the entire interest earned on SB deposits should be made tax free in the hands of depositors. This will not only help the depositors, but also the banks as well, as it will certainly improve the CASA deposits of banks considerably.

6. There is an urgent need to exempt from income-tax interest received from fixed deposit with banks at least partially, if not completely, to enable the depositors to get some relief from the high inflation that is eating into their savings. This will also help in diverting all unproductive investments in real estate and gold, which is effecting the deposit growth of banks today. This is the only way to improve the domestic savings rate, which has been falling during the last few years.


The depositors are the pillars of all banking institutions as banks survive only with their patronage. The CASA deposits with banks are the cheapest source of funds for banks and these depositors should be properly rewarded to ensure that such low cost deposits form a sizeable part of bank deposits, as they serve to improve banks’ profitability too. If dividends on shares of companies and long term capital gains on share investments could be exempted from income tax, there is certainly a strong case for fully exempting interest on bank deposits also from income tax, which could transform banking into a new orbit of growth never experienced before. RBI should, therefore, not only be a regulator of banks but also play a developmental role of championing the cause of bank depositors by persuading the government to offer tax incentives which can not only give a boost to the banking industry but also help in stepping up the growth of gross domestic product (GDP) of our country as well.

(The author is a banking analyst and he writes for Moneylife under the pen-name ‘Gurpur’ )

Balakrishna k s
9 years ago
1.Is it mandatory for banks to credit interest . For their savings bank customers quarterly or they can choose a Period to credit the interest?

2. My account has got credited interest on 30 Dec , then jun 30
Not credited on mar 30th and sep30 the... Is it fine?
10 years ago
good article...sir plz can you kindly explain why we less monthly interest credited in our accont as you have mentioned in your article and how it is discounted and calculated ....
like i have fd in axis bank of abt 90000 for one year getting interest of 9% per annum i have opted monthly interest payout..but i am getting Rs.335/month instead of Rs 337.5/monthly ..sir plz let me know why and how it is calculated by them...should i next time opt for yearly payout instead of monthly as per your article i think that is more plausible..
plz let me know ..
thanks and regards
rajan mutthuswami
Dayananda Kamath k
Replied to Rajan comment 10 years ago
you can opt for quarterly interest then you will be paid exact interest because as of now there is provision for quarterly compounding. if you opt for monthly then it will be given at a discounted rate. it would be advisable for reserve bank of india to make it mandatory to disclose exact rate of interest on discounted basis who opt for monthly interest for the purpose of transferency.
10 years ago
To add up my friends report one more step to improve the banking system would be to allow global banking institutions to participate in the Indian market.
This will setup a competition and give depositors a competitive interest rates on EAR (effective annual rates) for compounding interest daily, and allowing to deposit in dollars so as to be unaffected by the dipping currency value.
The banks are far clever than the writer to give interest rates on quarterly basis i.e in a scenario like this all banks would give an EAR instead of APR (Annual percentage Rate)
1 decade ago
When the rate of interest is equal to inflation rate, then there should be no income tax on it. Further the income tax should be only on the difference between the bank rate of interest and inflation rate calculated on consumer price index and not WPI.
p s deekshitulu
1 decade ago
Mr. Gurukul`s article on the payment of interest on bank deposits throw some light on the areas where banking can be improved for the benefit of depositors. Few suggestion made, like exemption of IT on interest earned on savings bank and fixed deposits, are good and really pass on some benefit to the depositors. However, the article appears as one side story in favour of depositors. In India, why public is still believing banking system to park their surplus funds. Because, it is providing safety to their funds. Also, the system is providing all types of flexibilities to operate their accounts. No lock-in periods, no harm for principal amount, no penalties on premature withdrawls, premature extension of deposits to reap the benefits of higher interest rates. Banks, including PSBs, are all commercial organisations with some social responsibility attached to them. Banks have balance all these things and show good results to satisfy their stake holders, including GOI. I do agree, still there is scope for improvement in service, which need to be highlited. In a liberalized economy, if the controllers liberalize the terms, it is upto the players to make use of it. If everything is insisted upon, how can we call it as liberalisation. Safety of funds is important for public and as on date there is no system in the country other than banks to bank upon.
nagesh kini
1 decade ago
While banks make merry by collecting deposits at lower rates and advancing the same at much higher rates, they are definately cheating the depositors. The CASA both in terms of volume and value are the largest store of funds more than term deposits but in real terms they remain at the bottom rung on interest payout.
If the RBI Governor really means business he ought to madate and not merely give a 'direction.'
The discount, however small for greater frequency has to be done away with.
The MOF has to totally exempt all incomes from bank interest.This can be brought about in an election year to earn more votes from the middle and lower classes.
Banks in the name of CDR waives/writesoff crores of interest from high flying wilfull defaulters but cringes in passing on the benefits to the country's millions of elders, pensioners, widows and disabled.
1 decade ago
I greatly appreciate the concerns raised by author, these are real time worry to senior citizen, near to retiring individual to errode away their hard earned money by inflation and income tax. Govt. and RBI must look into the benefit of public who trust on banks.
- Sandesh Patil
1 decade ago
I endorse all the suggesstions/recommendations made in this well articulated article
1 decade ago





saarey jahaan se achha hindustan hamara (jo thaa pahele, par ab bilkul hee nahee hai)!!!!!

jai hind!!
Anil Agashe
1 decade ago
Banks should be asked to pay interest monthly but if they were to do so they will obviously reduce interest rates so that they do not lose!
Ramesh Iyer
1 decade ago
Very informative and insightful article covering various aspects of Banking. It is time the Govt either raises the ceiling of tax-exempt interest income from Bank deposits, or exempt it altogether for senior citizens, who often have no other means of income except such deposits with Banks. In these times of higher n higher inflation, it would help senior citizens and those with low salaries / incomes to survive the economic challenges bestowed on them by the incumbent government.
Dayananda Kamath k
1 decade ago
it is also discriminatory also because banks charge interest on loans on monthly interval where as interest is paid on deposits in quarterly intervals. so if a bank is charging interest in monthly interval it should pay also in monthly intervals. i have long back brough this to the notice of rbi but they have left it to the bank managements. if the quarterly interst is charged the npa norms also will get breather as acounts will be treated as npa only after 180 days which will be a boon to genuine borrowers. banks are looting those who are taking loans against deposits by quarterly copounding interest on deposits and monthly compounding on loans agaianst deposit. which is also breach of contract of charging @2% above deposit rate for loans against deposit. hope rbi will woke up to the same.
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