Interest rates are offered for the deposits you make. The best way to understand this concept is by considering the Loan example. You can repay the borrowed amount over years in instalments, as interest rates, when you apply for it from a bank. However, when it comes to Savings Accounts, which party borrows money from whom?
So, when you deposit money, the bank borrows the funds and they pay theSavings Account interest rateson your balance. You can earn interest simply by saving money in the account.
Calculation of interest rates
Under Fixed Deposits, you deposit a fixed sum every month for a fixed tenure, which remains in your account until maturity. But in Savings Accounts, the balance fluctuates daily. It increases when you receive your salary at the beginning of the month. But when you withdraw funds, it reduces.You then receive the payouts from your monthly investment plan, driving the balance up.
Banks compute the interest rates on your Savings Account daily but credit it to your account quarterly, according to the RBI regulations. They may also do so every month, depending on their policies.
Are they simple or compound interest rates?
Simple interest iscalculated on thedeposited amount. Compound interest gets calculated on the deposited amount and the interest rates you earn. Therefore, you earn interest on interest, which is called compounding. Remember that banks decide the rates for the products they offer.
Factors that affect interest rates
Since the interest rates fluctuate, most of India’s established commercial banks have competitive interest rate on Savings Account. Owing to such differences, several factors are responsible for it:
Profitable preferences
Some banks enjoy a higher profit margin, while others lower their profitability to increase their customer base. Reputed banks with a high customer base focus on profitability by offering lower interest rates. The new banks attract more depositors by paying higher interest to them.
Repo rates
These are the rates at which commercial banks borrow money from the central bank. The RBI checks thequarterly repo rate and increases or decreases it depending on national and international economic factors. You can compare the interest rates on SavingsAccounts on the Banking app.
Liquidity
The bank’s liquidity means the level of cash and other liquid assetsthey need to pay as financial obligations.More liquidity leads to a higher Savings Account Interest Rates. Alternatively, if there is an issue with the cash flow, it means poor liquidity.The bank faces problems meeting this obligation and reduces the interest rates to protect its finances.
Go for banks offering higher interest rates on their Savings Accounts to make the most of your money.
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