Publications and Preprints

Rate of interest on term deposits -- A micro level study
Ashish Das and Praggya Das
Public savings in the Banking System are of prime importance to dictate the economy of India. A major component of such savings is through Time deposits constituting nearly 85\% of the Total deposits. Furthermore, Term deposits constitute a major component of such Time deposits. Considering all scheduled commercial banks of India, Time deposits are in the order of Rs. 830,000 crores and are growing at more than 17\% every financial year. The interest amount paid on the Time deposits directly depends not only on the rate of interest applicable to such deposits but also on a number of other factors, including the method used to calculate the same. Though there has been a lot of discussion in the literature on the quantum of the rate of interest, there appear to be no discussions on the method of calculating such interests. This could be because it was thought that the method of calculation should have one and only one meaning. In this paper, we discuss the mathematics of rate of interest and give several different methods of calculating the interest amount. Although not an exhaustive list, the methods of calculating interest described here are some of the more common methods in use. They indicate that the method of interest calculation can substantially affect the amount of interest paid, and that depositors should be aware not only of nominal interest rates but also of how nominal rates are used in calculating total interest amount. Moreover, since the depositors constitute 89\% of bank customers, in the interest of customer protection as also to bring about meaningful competition we observe that it is necessary to have a greater degree of transparency in regards to effective interest rates for depositors.

isid/ms/2002/13 [fulltext]

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