Its secret is hidden in your credit card itself.Image Credit source: Unsplash
The Reserve Bank of India reviews its monetary policy every two months, then announces the repo rate. Banks borrow money from RBI at this rate and it is same for all the banks of the country. Despite this, every bank charges different interest on loan from its customers or offers different interest on FD, why does this happen?
Well its secret is hidden in your credit card itself. At the same time, the repo rate is a standard for fixing the interest rate, while apart from this there are many factors which are used to decide the interest rate of loans and FDs of banks. Let’s understand this too…
maths of bank and repo rate
The Reserve Bank increased the repo rate by 2.50 percent from May last year to February this year. While there was no change in the repo rate in the last monetary policy review of April. At present, the repo rate of RBI is 6.5 percent.
Now it can be understood that if a bank has borrowed Rs 100 from RBI, then it will have to pay Rs 6.5 as interest. Consider it as such that RBI gives notes to the banks of the country to do business and collects its rent in the form of repo rate.
Factors That Determine Interest Rates
Now the advantage of increasing the repo rate is that banks have started giving its benefits to their FD customers and started paying more interest on FD schemes than before. While on the other hand, the interest rates of the loans of the banks were also increased, that means the income of the banks also started increasing. Then why different banks have different interest rates? For this we have to understand the banks funding model.
Actually, the interest of banks depends not only on the repo rate but also on how much cash is available with them. How much loan can they give in the market? What is the number of customers taking loans from banks? What is their asset quality? How much money do banks have to pay people? How much interest does the customer have to pay on the deposits he has? What is the number of customers who make deposits with banks and how many deposits come to them? How much does it cost the bank to raise funds in all these ways?
These are all the factors that decide the interest rate of the bank. The bank which has sufficient cash. He gives loan to people at low interest, and raises money through FD only at low interest, whereas the bank which lacks capital, such as Small Finance Bank, raises money by offering high interest on FD to the people. And then grow your business by earning marginal on loan.
This secret hidden in credit card
You can understand this whole system with your credit card. When you initially use a credit card, your credit limit is less, because the bank takes the risk by giving you a credit card. But if you pay on time and use the credit card properly, then your credit limit keeps increasing, because now your credibility has increased due to your credit behavior.
This has another advantage while taking loan. Increasing credit credibility improves your CIBIL score. Therefore, when you go to take a loan from the bank, then your bargaining power ie bargaining power is more, so banks also provide you loan at a discount rate.
