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Calculating your SB account interest

Murali Iyer

What do you do with your monthly salary? Whether you get it in cash or by cheque, most of us directly go to the bank and deposit the same in our savings bank (SB) account. Or else, your company would be directly crediting the same to your account opened at a bank, where the company also maintains an account. This is done to save you the trouble of banking the cheque. The amount gets transferred from the company's account to yours directly.

Once the money is credited to your account, you go ahead happily withdrawing cash or issuing cheques by checking whether your bank balance supports the move or not. But what happens to the balance when it is not being utilised by you? If you are wondering whether I am sane for asking such a question, allow me to explain. While a current account doesn't earn any interest as the amount gets utilised continuously, a SB account should be fetching you some interest for keeping the funds parked with your bank. Keep in mind one thing. A SB account fetches the lowest interest amongst all investment avenues.

Yet, how much you earn is not always as important as how much you save. Savings are for our future - be it retirement, emergencies, eventualities or for important occassions like marriages, festivals, etc. They are also used for purchases like housing, durables, vehicles, white goods, electronic items, et al. Even though, we all realise the importance of savings, most of us don't bother to check whether interest calculated on our SB account is correct or not. For get this. How many of us actually bother to check the interest earned on our SB account when we update our passbooks or get our monthly statements from the bank? I take this opportunity to confess that I don't.

Banks add interest to your SB account twice a year, usually in April and October, or in January and July. And then there are some banks that do the same annually, either in December or in March. However, as I have said earlier, not many notice whether the interest has been entered or not. And then there are those who notice the interest credited to their accounts, but don't know whether it is correct or not. One of the most common excuse, in such cases, that one gets to hear is that he / she is unaware of the method of interest calculation to find out whether the amount entered is the right one or not. Although you may feel that banks use a complex method of calculating interest, it is not so. You don't have to be an accountant to arrive at the correct figure.

Calculate your interest
To help people calculate the interest on their SB accounts properly, the All India Bank Depositors' Association (AIBDA) has developed an easy method. This helps account holders to know whether the interest has been added correctly or not. Verification of the same can be done by following certain steps.

For starters, examine the passbook or bank statement thoroughly. See whether interest has been credited to your account before the 10th of April as well as October. For matters of convenience, I am assuming that your bank credits interest to your account bi-annually, and at the end of April and October. To calculate the interest up to April, banks take the deposits on the previous six months into consideration, i.e. from October of the previous year. So, when your bank will calculate interest on your SB account in April 2000, it would consider the period from October 1999 to March 2000. Similarly, for calculating interest up to October 2000, the deposits taken into account will be for the period from April to September 2000.

Interest for a particular month is calculated by the banks on the basis of the lowest balance during the month. It could be on the 10th of the month or any other day after that. Some banks like ICICI Bank calculate the interest on the lowest balance maintained between the 20th of the month and any other day after that.

Write down the lowest figure for each of the previous six months, and then add them up. Divide the total amount (arrived at by adding the lowest monthly balance of the previous six months) by a figure of 4. The result is the interest (in paise) that you get, at a rate of 3% per annum. Convert this figure into rupees. The net result is the interest that should accrue to you on your savings at a 3% per annum rate of interest. Compare this with the interest being offered by your bank. It should be 4.5-5% per annum. Thus, to find out the final interest payment at the prevalent rate of interest, one could take take the help of simple arithmetic. Thanks to AIBDA, you can also keep in step with your bank.

Let's understand how
For understanding the method of calculation better, let's assume the entries in a particular passbook for the period of April 1999 to September 1999 :

Month	Lowest Balance (Rs)
April	800
May	1600
June	2200
July	700
August	2500
September	1100
Total	8900

On dividing the total of Rs. 8,900 by 4, we get the figure of 2,225. Thus, the bank should be giving an interest of 2,225 paise, which is equivalent to Rs. 22.25, at the rate of 3 per cent per annum. But, as the prevalent rate of interest is 4.5 per cent, the interest in this case will be :

(4.5 x 22.25)/3 = 33.375 or Rs. 33.38

Based on this figure, you can calculate whether the bank has done its job properly or not. Although it is true that banks do not calculate interest in this manner as they have a computerised form of accounting, the answer would still remain the same. This can also be verified accurately.

Rules that banks follow
For calculation of interest and other matters, one should be aware of the rules followed by banks. For example, one has to maintain a certain minimum balance with a bank to be eligible to earn interest. If interest is not added to your account before the 10th of April or October, you should bring it to the bank's notice. You should also know that if you deposit an amount by cheque, this has to be entered into your account on the third working day, provided it is a local cheque.

If you find any mistake in your account regarding the calculation of interest, even after a long time, don't hesitate to approach your bank and get it rectified. For example, suppose a bank does not credit interest due to you in a particular period but does it after a certain period of time has elapsed, citing internal problems. You are liable to get interest due to you and also penal interest for the time taken by the bank for not crediting your account. Calculating interest due to you on your SB account from the bank is in your own interest!

Related Article: Watch your savings grow

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