A Comparative Study on The Interest Rate Changes Affecting Public and Private Sector Banks in India

Abstract

Interest rates play a very important role in every financial institution’s functioning, and it is a key factor that affects public sector banks and private sector banks. These interest rates that banks use to lend money to the public and borrow from other financial institutions and the central bank has an impact on the economic. Generally, interest rates prevailing in the economy go hand in hand with the bank profitability. The banks also benefit from higher interest rates which means they are able to take advantage of the greater spread which is the difference between the interest amount they pay to lenders and the amount paid as interest to borrowers. Higher interest rate is an indicator of an economy that is healthy but at the same time it may discourage borrowers from taking loans from banks because now, they have to pay more as interest. So, the central banks end up decreasing the interest rates so that borrowers also enjoy it to some degree. Banking industry does not only just commercial banks but also investment banks, brokerage firms and insurance companies. These institutions have massive holdings of cash where a portion of it is kept aside for liquidity purposes (SLR, CRR) and the rest is reinvested into many other investment avenues. Mostly it is given out as loans and the rest is invested into the treasury bills of the central bank which carries no risk. This way banks can pay lesser interest to the government than the higher rates that are paid to borrowers. The proportion between these also affects the bank’s profitability.