FLOATING RATES OF INTEREST ON FIXED DEPOSITS
We are used to pay interest at fixed rate of of interest. The implication being we know exactly what would be our commitments on this account. Then bank started offering flexing rates of interest on our housing loans. Under the scheme customers have to shell out more money when ever the interest rates hot up. This exposed the customers to interest rate risk.
We have also been used to get fixed rates of interest on our fixed deposits depending on the period of maturity, rate of interest depended on market conditions. How about your fixed deposits in banks earning floating interest rate? India's biggest lender SBI is all set to offer floating rates that may give higher returns depending on market conditions.
A few years back when the interest rates were so high and thanks to the unpredictable market conditions, a number of my colleagues opted for Provident Fund instead of pension As we subsequently noticed, crashing of interest rates, coupled with high level of inflation, made them realize their folly.
Coming back to fixed rates of interest on loans, State Bank of India announced launching of fixed-floating product, whose rates will be linked to the Base Rate. The product will be launched on September 6. This is pursuant to RBI permitting banks early in 2002 to float such products. The interest rate will change in tandem with the Base Rate. An example will make the issue more clear. Assuming the base rate of SBI at present of 7.5%, for one year the floating fixed deposit rate would be 7%, i.e. 0.5% less than the Base Rate, compared to fixed deposit for comparable maturity periods at 6.75%. The floating rates of FD however, will not offer any guarantee on returns.
Once the product is launched by SBI other leading banks are likely to follow suit. However, to be in the field banks have to adapt themselves to the changed environment. The customers are to benefit in case of any increase in base rate and to lose in case there is decline.