How Is Your Bank Stopping You From Earning More?

Fixed Deposit Interest Rates
Percent symbol and business chart on financial paper, red arrow moving up. 3d render and computer generated image.

Banks are the financial backbone of the society for the general public. You not only deposit money and valuables for safekeeping but you also borrow when in need for emergencies and major life and financial goals from your local bank. Understanding how banks work especially in the interest rate area will help you determine your future course of action when planning your finances. 

How is the interest rate in banks determined? 

Indian banks are governed by the central bank, the Reserve Bank of India (RBI). The interest rates they offer is determined by the key policy rates announced by the RBI.  The REPO rate or the Repurchase option rate is one at which banks borrow from the RBI. There is another rate which banks use – MCLR or marginal cost of incremental lending rate. This is the rate exclusive to each bank based on their deposit rates and interest on loans. Yet, due to competition, most banks provide similar rates of interest. 

Current rates

Bank Rates on fixed deposits are currently around 7-8% maximum for the highest tenor. Yet, if you compare the returns with other investment options in fixed income instruments, it is one of the least returns. PPF, SCSS, Small Saving Schemes and Post office schemes also offer in the range of 7.5% to 8.9%. So bank fixed deposits are not necessarily the best option from a returns standpoint of view. 

So why are banks the least paying option?

Banks decide deposit rates in tandem with the loan rates and the general requirement of loans in the economy. If they realize through their estimates and business performance that lesser loans will be required, they decrease the rate a little to tempt individuals and businesses to take loans. Accordingly, the deposit rates might or might not be increased depending on how much available deposits they have. 

Similarly, if the offtake of loans is high in a quarter, the interest rates on loans go up as there are many takers for the same money. Yet, there may or may not be an increase in the interest rate for depositors owing to the availability of credit already or the economic risks might push people to reach out to the safety of fixed deposits. Also, people tend to go for 5 years fixed deposits for tax deductions under Section 80 C. Thus, the opportunities for depositors to see interest rates in India rise quickly are quite less. 

Other higher-paying options

If you follow the interest rate changes by banks when the RBI makes these policy announcements, you will realize the ceiling for incremental earning is limited with bank fixed deposits. It’s better to go for an equally safe and guaranteed instrument with much higher returns – a company fixed deposit. 

Features of Company Fixed Deposits 

High-interest rates – Company Fixed Deposits like Bajaj Finance FD offer rates ranging from 8.6% for a new customer to 8.95% for a senior citizen in a 5-year tenor. Returning customers get an additional 0.35%.

Flexible tenors – You can choose tenors ranging from 12 months to 60 months and also create a series of investments which mature in a continuous stream of maturities – called Laddering. This method works well to create a corpus or a stream of income for pre-decided goals.

High guarantee – Bajaj Finance FDs are secured and guaranteed by high credit ratings of MAAA (stable) rating from ICRA and FAAA/Stable from CRISIL. This means you are assured of timely interest payments and capital repayment. 

Ease of investing and payout – You can open an FD with a minimum of Rs 25,000 and use the online FD calculator to check out the maturity amounts pertaining to your capital and tenor. You can look forward to cumulative and non-cumulative options. You can determine the payout as per your requirement. The non-cumulative option will give you returns at maturity after combining interest on interest and result in a sizeable corpus.

Thus, while bank FDs limit your earning potential, you can look forward to Company FD to bridge that gap.