BANKS,ACCOUNTS AND INTEREST RATES
The people working at banks are stressed-out most of the time.,and if your’e working in a country with 1 billion people,this job is not easy.So,the next time you get into a bank with no idea about the type of account you want to open,or the best loan for you,don’t expect to get clear answers from desk-clerks.I’m gonna attempt to provide a ‘BRIEF INTRODUCTION’(this should be a marketing phrase,one always ends-up wanting to know more).I am no bank manager,i learnt all this from observation.
This type of account is mostly for employees who ‘withdraw’ frequently.The interest rate is not going to be as high as a fixed-deposit account,the reason being banks can’t lend out too much of your’e money because of policies set by the regulatory body.(Wanna know more?check the References).The interest rates on Indian savings accounts are usually 3-5%,depending on the PLR(Prime Lending Rate) set by the RBI + the rate the bank sees fit.(When you see a clause in the newspaper which says,”RBI has de-regulated savings bank interest deposit rates”,this means the bank can set any rate they want,depending on their competition ofcourse).
So,the next time an Indian bank manager ask you,”Which type of account do you want to open?”,for Heaven’s sake,don’t reply,”I hope you could help me with this”.The worst case,he’ll chuck you out with a Current account :p).-the interest rates on current accounts are usually 0%.
These are the highest paying,right now at 8.5-9.5%.Once you put your’e money in a fixed deposit account,its essentially in ‘Lock-up’.You can’t take it before it ‘matures’.If you do,there’s going to be a hefty penalty.Now,here’s the part your’e gonna get confused,read carefully:
The fixed deposit interest rates are lower for accounts with longer maturity periods,for ex.a F.D a/c with a 1 year maturity period will have a interest payback of 8.5% say, and a F.D a/c with a maturity period of 2 years may have a interest payback of 8%,let’s say.Now,intuitively,you must have thought the bank was supposed to pay you more when you keep the money ‘IN’ for longer right?Nope.
Reason:Essentially,you want the bank to be paying you an 8% on your principal constantly for 2 years straight,no matter what the market situation is.Perhaps,in the coming next month,the interest rates would be dropped to 7%,but your’e still gonna get the ‘good end of the stick’ i.e 8% because you were clever enough to open an F.D at the right time!
This type is mostly for business-men/women.Banks rarely pay any interest on it.But,the pros of such account are that:
1.The bank certifies that you’ve got enough balance in your account(something that’s gonna give your customer confidence).This is kind-of like using the ‘Cashier’s check’.
2.You get to use the overdraft policy i.e draw more than you have in your a/c but upto certain limits of-course.
Remember,banks can charge any interest rate they want depending on your credit points.Investopedia explains this well,”Default risk is the main determiner of the interest rate a bank will charge a borrower. Because a bank’s best customers have little chance of defaulting, the bank can charge them a rate that is lower than the rate that would be charged to a customer who has a higher likelihood of defaulting on a loan
1.If you want to delve deeper into why the interest rates are so low: http://www.nytimes.com/2010/12/04/your-money/brokerage-and-bank-accounts/04money.html?pagewanted=all
2.How Do Banks Change Rates Based on the Prime Rate?