How floating rate interest has helped banks more then either the borrowers or depositors.

A real example

Year 2010

Banks FD rate was 8.25% and lending rates was 10%. A gap of 1.75%.

Suppose you had Rs. 1 cr FD with the bank then bank will pay you Rs. 8.25 lac interest.
You also took loan from bank of Rs. 1 cr. Bank would have charged you Rs. 10 lacs as interest.

You had a deficit of (Rs.10 lac minus Rs. 8.25 lac) Rs.1.75 lacs.

Suppose nothing has changed then for last 10 years you would have received Rs.8.25 lacs * 10 (Rs. 82.50 lacs) n paid
Rs. 10 lacs*10 (Rs.100 lacs). So for 10 years you had total deficit of Rs. 17.50 Lacs.

But in reality this gap increased to around Rs. 22 lacs!
Because in last 10 year

- whenever interest rate in economy went up, banks immediately increased the borrowing rates, but FD
rates were not increased immediately.

- whenever interest rate in economy came down, FD rates were reduced immediately but interest on borrowing was not reduced immediately.

- whenever these adjustments in FD rates and borrowing rates were made, either they were made with time
lag or not in the proportion in which rates have moved up or down.

- if interest rates moved up say by 0.50% then FD rates were not increased immediately but with a lag and that too only partially say 0.10% to 0.25% and but borrowing rates were invariably moved up immediately n
that too minimum by 0.50%.

- if interest rates moved down say by 0.50% then FD rates were reduced immediately and that too by minimum 0.50% and sometimes more. But borrowing rates were neither reduced immediately nor benefit of reduced rates were passed on to borrowers fully.
- these adjustments were always made in a way that it’s banks which got a better part of the deal.

It’s ironic but true that if you are a borrowers in India you always paid market rates but as FD investors you never got market rates.

A better alternative to FDs can be gilt
/banking and psu funds! But this through a proper advice.
Killing me softly with your (floating) rates!!! @_nirajshah @BloombergQuint @AnilSinghvi_ @ZeeBusiness @ActusDei @livemint @SanketD_ET @EconomicTimes @PrashantmET

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