March 23, 2023
Earning More

Earning More

Many people are struggling to earn more money because their banks are preventing them from earning more. There are many ways that your bank can stop you from earning more, and it can be difficult to determine which method is being use. One common way that your bank can stop you from earning more is by limiting your spending. Your bank may also prevent you from taking out new loans or investing in new businesses. If you’re not able to make the required payments, your bank may declare you in default and take away your possessions.

Banks are the financial backbone of 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 determine?

Indian banks are govern by the central bank, the Reserve Bank of India (RBI). The interest rates they offer are determine 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 that 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 require, they decrease the rate a little to tempt individuals and businesses to take loans. Accordingly, the deposit rates might or might not increase depending on how many 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 of 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 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 that 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.

Ease of investing and payout

If 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.

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