The Product Method is a way to calculate interest on loans or deposits by multiplying the outstanding balance by the number of days it remains in the account. The daily product is the balance amount multiplied by the number of days it was outstanding. Summing these daily products over 30 or 31 days yields the monthly product.
Interest Calculation Process
- Daily Interest Calculation:
Interest is calculated daily on the account’s closing balance at the prevailing interest rate, in accordance with Reserve Bank of India (RBI) guidelines. The interest amount is rounded off to the nearest Rupee. - Total Product Calculation:
- Add the products for each transaction (amount × days outstanding).
- Formula:
Interest = (Sum of Monthly Products × Interest Rate) / (100 × 12) - Application in Cash Credit Accounts (CC):
- Interest on a CC account is charged on the daily closing balance, not on the total sanctioned limit.
- This means borrowers pay interest only on the amount used, not the entire credit limit.
- Daily products in CC accounts reflect operational expenses like purchasing materials or paying suppliers.
- Monthly Interest Calculation:
- If the product is calculated monthly, interest is applied to the total product using the monthly rate, as shown above.
Regulatory Guidelines
- This method applies to both loan and deposit accounts for retail and corporate customers.
- Interest is calculated daily on the closing balance, following current RBI regulations.
