Interest is the cost of borrowing money. The best way you can understand it is to consider the Loan example. You can repay the borrowed amount over several years in instalments, including interest when you apply for it from a bank. However, in the case of Savings Accounts, which party is borrowing money from whom?
Technically, when you deposit money, the bank borrows the funds from you while paying you interest on the Saving Account balance. You can earn interest simply by saving money in the account.
How is it calculated?
In a Fixed Deposit, you deposit a fixed sum at the beginning of the investment tenure, which remains in your account until maturity. But for Savings Accounts, the balance may fluctuate daily. It increases when you receive your salary at the beginning of the month. When you withdraw funds, it reduces. Later, you receive payouts from your monthly investment plan, driving the balance up.
Banks calculate the interest accrued on your Bank Account daily but credit it to your account quarterly, as per the Reserve Bank of India regulations. They may also do so every month, which depends on their policies.
Is it simple or compound interest?
Simple interest is calculated only on the deposited amount. But compound interest gets calculated on the deposited amount and the interest you earn. Therefore, you earn interest on interest, thanks to compounding. Remember that banks can decide the rates offered on their products.
What factors affect interest rates?
Since the interest rates became deregulated, most of India’s established commercial banks have maintained low Saving Account interest rates, ranging from 3.5% to 7.8% today. With such a vast difference, several factors are responsible for it:
Profitability preferences
Some banks enjoy a higher profit margin, while others are willing to lower their profitability to increase their customer base. Established banks with a high customer base prioritise profitability by offering lower interest rates. Newer banks attract more depositors by paying higher interest to them.
Repo rates
These are the rates at which commercial Indian banks borrow money from the central bank. The RBI reviews the quarterly repo rate and increases or decreases it depending on national and international economic factors. You can view and compare the interest rates on Savings Accounts on the Banking app.
Liquidity
The bank’s liquidity indicates the level of cash and other liquid assets to pay its financial obligations. More liquidity leads to a higher Bank Saving Account interest rate. Alternatively, if there is an issue with the cash flow, it leads to poor liquidity. The bank faces trouble meeting this obligation and reduces the interest rates to protect its finances.
Opt for banks offering higher interest rates on their Savings Accounts to make the most of your money.
Keywords: interest on Saving Account, Saving Account interest rates, Bank Saving Account interest rate