Non-resident Indians, who keep their surplus cash in rupee-denominated non-resident external (NRE) and non-resident ordinary (NRO) savings accounts with Indian banks, will receive higher returns. This follows a decision by the Reserve Bank of India (RBI) to calculate the interest on a daily basis from April 2010. Interest is currently calculated on a monthly basis. Indian bankers in the UAE said the move would be a boon for NRI customers but would increase the cost of raising funds from deposits for Indian banks.
And they said the decision would make short-term deposits of 15 to 60 days less attractive because customers would receive almost the same interest rates from NRE and NRO schemes while enjoying the benefits of a savings bank account. The RBI said in its credit policy notification: "We advise that on a review, and in view of the present satisfactory level of computerisation in commercial bank branches, it is proposed that payment of interest on savings bank accounts (NRE and NRO) by scheduled commercial banks would be calculated on a daily product basis with effect from April 1, 2010."
NRE deposits contain repatriated money while NRO accounts contain money received within India from investments and other sources. N Selvarajan, Chief Manager of City Exchange (Ajman), an affiliate of the State Bank of India, said: "Now banks calculate monthly interest on the minimum balance maintained on the tenth and last working days of the month. "A customer who keeps Rs500,000 in an account until a day before the last working day and withdraw Rs450,000 will get interest only on the Rs50,000 balance on the last day. Once the new interest system becomes effective the banks will calculate interest on a daily basis." He said the move would help NRI depositors and adversely affect the cost of borrowing from banks. NRIs with flexible housing loans or other loans will see interest rates go up.
At present even if the interest rate on a saving account is 3.5 per cent customers receive less than three per cent because of the method used to calculate interest payments. Joseph Thomas, Chief Representative of IndusInd Bank, an Indian private bank in Dubai, said the new system would make life easier for NRI depositors. "The new system will benefit customers who keep their surplus funds to use for trading or investment purposes at a suitable time. They won't have to monitor their balance at the end of every month. Instead they will rely on savings bank accounts. Banks already calculate interest on an overdraft on a daily basis. With minor modifications to the software the daily savings interest payment can be calculated easily." He said the competitive advantage enjoyed by banks with the highest percentage of current account and saving account (Casa) deposits would disappear and the banks' average cost of raising funds would go up.
"Banks will have to pay 30 to 40 per cent more than their current outlay for Casa. Calculating interest on daily basis will make short-term deposits - 15 days, 30 days, 45 days and 60 days - less attractive for depositors who are careful about the return from their deposits. "When customers get about 3.5 per cent on their savings not many will park their funds in short-term deposits."
