It is possible to get monthly interest from FD but with a discounted rate

Here is how a video advertisement from a leading private bank proceeds: You Pay phone bills, electricity bills and EMIs monthly. But earn interest on the Savings account only once in three months. But now there is a bank that credits interest in your Savings account every month instead of 3 months. And you earn interest on that interest with the power of monthly compounding. Then it claims that this private bank provides monthly interest on its savings bank accounts which is unique. The advertisement is carried out by a celebrity who is known for his deep, baritone voice and who is a narrator, a playback singer and a presenter for numerous programs and the private bank seems to have signed him as its brand ambassador.

There is no doubt that his voice is very persuasive. But what exactly is the benefit derived from the savings account holders? Is the monthly credit of interest in a Savings Account all as attractive as it is made out to be?

Investors must try to understand the difference between monthly payments and quarterly payments of interest on Savings Bank to know its impact on their return. Many years back, the Reserve Bank of India had left it to the discretion of banks to decide the rate of interest on deposits (term deposits as well as Savings Bank deposits). The interest can be credited at quarterly or shorter intervals. For savings accounts, the calculation is based on daily products.

Though the RBI has permitted to pay interest on deposits at quarterly or shorter intervals, most of the banks pay interest only at quarterly rests. Theoretically, interest can be paid even daily or weekly.

Though this private bank pays interest on Savings Bank accounts at monthly rests, for fixed deposits it pays interest at quarterly rests. It is possible to get interested in FD monthly but with a discounted rate.

How exactly is the monthly interest beneficial to the customer?

Let us assume that Rs.10000 is left in a Savings Bank account for a year, at 4 percent interest per annum. If the interest is calculated and credited every month, at the end of one year the balance will be Rs.10407.42. On the other hand, if the interest is calculated every quarter and credited, the balance will be Rs.10406.04. There is a small difference of just Rs.1.38 between the two. One may think that when the balance is more, the difference may be more. But why should one keep a huge balance in a Savings bank, which is only beneficial to the bank and not to the customer?

In June 2022, to protect consumer rights against wider advertising issues, the Central Consumer Protection Authority (CCPA) notified the Guidelines on Prevention of Misleading Advertisements and Endorsements for Misleading Advertisements, 2022 (the "Guidelines") with immediate enforcement.

Clause 4 of the guidelines lists the items which will qualify as valid and non-misleading advertisements. As per Clause 4. b. “Non-misleading consumers through exaggeration of the product or service’s accuracy, scientific validity, practical usefulness, capability or performance” will qualify as a valid and non-misleading advertisement. When a savings bank customer’s benefit by way of monthly payment of interest is hardly one or two rupees in a year, can this advertisement be treated as one offering some practical use? One expects that the Advertising Standards Council of India (ASCI) to decide on this.

Couplet 423 of Thirukkural proclaims “Though things diverse from divers sages’ lips we learn, ‘Tis wisdom’s part in each the true thing to discern. Bank customers must ponder over this wise saying by Thiruvalluvar and they should not be carried over by high-powered advertisements by celebrities.

(The writer is a retired banker)