Your savings bank account can earn you more interest now. The Reserve Bank of India [Get Quote] has issued a directive in its policy document that will change the way interest is paid on the minimum amount present in a savings bank account each day.

At present, the interest (3.5 per cent per annum) is calculated on the minimum balance held in the account from the 10th of each month to the last day of that month. So, if a bank customer has Rs 1 lakh in his savings account one day and then Rs 100 another day, the minimum balance taken for calculation of interest in the period would be Rs 100.

But, from April 1, 2010, the interest paid on the savings account will be on the daily minimum balance. In other words, even the Rs 1 lakh balance in the savings account will earn the customer interest, even if it is withdrawn later.

As per the new directive issued by RBI, only commercial banks will need to follow this new method of interest payment on savings accounts. Commercial banks include all banks other than co-operative ones.

RBI had received requests to change the present interest payment structure from the banks themselves. In its policy document issued on Tuesday, RBI said that banks had proposed two structures: Either interest should be paid from the first to the last day of each month, or on a daily basis.

RBI referred the matter to the Indian Bank's [Get Quote] Association, which comprises of private as well as public sector banks, along with co-operative banks and foreign banks.

The association decided that calculation of interest should be done on a daily basis as this has become more feasible with banks increasingly adopting core banking solutions (which refers to the use of information technology platforms).

In the policy document, the RBI said that '...modalities in this regard will be worked out in consultation with the banks.'

"This will definitely motivate people to hold more money in their savings bank accounts," said Manju Srivatsa, president for retail banking at Axis Bank.

Another banker pointed out that the present system encouraged customers to keep large sums either in short-term fixed deposits or liquid funds. "This will change once the system to pay interest on a daily basis is implemented," the source said.

Bankers said that, though the new system will amount to higher interest payouts and may even result in a slight rise in the cost of funds, it can be managed. If the customer holds the money in savings account, banks' dependence on fixed deposits will decrease.

Bankers also said that this may result in customers keeping higher amount in NRI-related savings accounts.

"The interest offered on savings bank accounts in India is much higher than what is offered on term deposits in many countries," said Srivatsa.

This means that the money will start earning higher interest even as it remains liquid and safe.