Interest Rate system in India - Central Banking, Indian Financial system Video Lecture | Indian Financial System - B Com

Oh
interest rate system in Indian banking
in this session we are going to cover
Bank rate
base rate system
and deposit interest rates
so first of all
we see the interstate segments
in Indian banking the interest rate fall
into two categories
the first category of interest rate is
called regulated interest rates
the regulated industries are those
interest rates which are fixed by
Reserve Bank of India
so here banks apply those interest rates
which are fixed by Reserve Bank of India
banks do not fix their own interest rate
in certain segments so they are
regulated interest rates as against
regulated intestate we have another
category called deregulated interest
rates so deregulated interest rates
include those interest rates which are
fixed by individual bank boards and most
of the interest rates in the present
Indian banking they are fall in they
fall in deregulated interest rate
category
so first
bank rate what is bank rate
Bank rate is fixed by Reserve Bank of
India
this rate is changed from time to time
whenever Reserve Bank of India changes
repo rate so whenever repo rate is Jade
bank rate is linked to repo rate and
automatically the bank rate is changed
what is bank rate how do we define bank
rate bank rate is the interest rate
which Reserve Bank of India recovers
from banks when Bank sorry discount
commercial bills or instruments with
Reserve Bank of India
so whenever banks come to Reserve Bank
of India to raise money by way of
rediscounting of commercial bills or
commercial instruments then that rate of
interest which RBA recovers from banks
is called bank rate now to clarify what
is rediscounting so rediscounting is a
process in which banks discount to bills
of exchange from borrowers and
accordingly they pay money to the
borrowers
and against that loan there is loan from
Reserve Bank of India so they get funds
from Reserve Bank of India that is
called re discounting of commercial
bills and rate of interest which Reserve
Bank of India is recovering from banks
on this rediscounting of commercial
bills or instruments is called base rate
bank rate so bank rate it is the rate
which is fixed by Reserve Bank of India
no base rate
base rate is the basic interest rate
which banks charge on loans given by
them so whenever banks are giving loans
they recover interest and that interest
rates are the basic rate
that is called base rate so base rate is
the basic rate which is charged by banks
on loans given by them base rate is
fixed by Board of Directors of the
concerned banks this means all banks
have different base rate
so base rate is different with all banks
whereas bank rate is decided by Reserve
Bank of India t uniform for all banks
banks cannot charge rate of interest on
loans below the base rate so whenever
banks are sanctioning loans the rate of
interest which they recover from
borrowers it cannot be less than base
rate however there are certain exception
to the general rule so there are certain
loans which are specifically exempted
which can be less than base rate also in
general banks cannot charge interest
rate on loans below the base rate
actually interstate charged by banks is
not the base rate base rate is the
minimum base amount interest rate so
actually interstate which banks are
charging is something like this so base
rate plus some premium it mean in most
of the loans the rate of interest will
be more than base rate now base rate is
fixed by banks take into account certain
factors so these factors are number one
the cost of funds that mean the cost the
banks are paying on raising money then
operational cost the cost they pay to
manage these funds then risk a cost so
there is some cost of risk also which
banks have to be R so when they fix base
rate they take into consideration this
cost also
and lastly return on funds how much
profit they want to earn so these are
four factors which broadly banks take
into consideration when they fix the
base rate
the interest rate on individual loans
whenever banks are charging interest on
individual loans then it is charged by
adding risk premium to the base rate so
from individual borrowers the interest
rate is charged as base rate plus some
risk premium risk premium is determined
on the basis of credit rating of the
borrower so banks have a system to
undertake credit rating of the borrower
how do they consider an individual
borrower so there is credit rating
system so based on that credit rating of
the borrower they determine the risk a
premium so far good credit rating the
risk premium will be low and far not so
good credit rating the risk premium
would be high that means for low credit
rated borrowers the interest rate would
be higher and for high credit rated
borrowers the interest rate would be low
interest rates also vary according to
that time period for which the loan is
given so banks provide short-term loans
and banks also provides long term loans
so the interest rates also vary
according to time period for which the
loan is given normally for short-term
loans the interest rate is a higher
now interest rate which the banks charge
it can be fixed rate which does not
change during the period of loan or it
can be floating rate so if it is a
floating rate loan then this rate of
interest is reset periodically
no interest rate on deposits
for the purpose of interest rate
deposits can be segregated into three
categories so the first categories
current deposits second categories
saving bank deposits and third category
is term deposits
on counter deposits no interest is paid
on saving back deposit interest is fixed
by banks themselves
and it is paid on daily product basis
so saving bank deposit rate is fixed by
banks themselves it is in the
deregulated category on term deposits on
fixed deposits or on recurring deposits
so on term deposits which comprise fixed
deposits and recurring deposits the
banks fix rate of interest themselves
according to maturity period of the
deposit normally for shorter maturity
period the interest rate is low and for
longer maturity deposits the interest
rate is higher
in fixed deposit cases if fixed deposit
is then cashed before maturity banks pay
interest applicable to the corresponding
maturity and they also deduct a penalty
if any say fixed deposit is encashed
before maturity then banks pay lesser
interest and they also recover penalty
for prepayment
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