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What is Interest Rate?

IndianMoney.com Research Team | Posted On Monday, January 21,2019, 12:07 PM

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What is Interest Rate?

 

 

What is Interest Rate?

 Interest is defined as the additional amount payable by the borrowers. Interest can also be defined as the extra money charged by the lenders on the money lent. Interest rate is the rate at which the lenders levy interest on the money lent.

BREAKING DOWN 'Interest Rate'

Interest rate is the cost of debt for borrowers and rate of return for lenders. Interest is charged on all kinds of loans/debts. Earning returns in the form of interest is what motivates lenders to lend.

Borrowers borrow money for various reasons for fulfilling their requirements like purchasing home, education, starting/expanding their business and so on. The money borrowed has to be repaid either in lump sum at a pre-determined date along with the interest agreed, or in equated monthly installments/EMIs.

Simple Interest Rate

Simple Interest is a type of interest applicable on the amount borrowed for the term of the loan. There is no consideration on other factors while calculating Simple Interest. Simple Interest is levied generally on short term loans. Simple interest rate is a ratio and is expressed as a percentage. Simple Interest plays an important role in determining the amount of interest on a loan or an investment.

The money lent is called ‘principal’, duration of repayment is called ‘term’ in months, Simple Interest rate is called ‘rate’ and Simple Interest is generally referred to as ‘interest’. Below mentioned is the formula used to calculate Simple Interest:

Simple Interest = (Principal * Term* Rate) / 100.

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What is Interest Rate?

Compound Interest Rate:

Basically, Compound Interest is the interest calculated on the Simple Interest earned. Its interest on interest.

With compound interest, your investment grows fast. Compound Interest enables you earn more on your investment. Compound Interest can be compounded on daily or monthly or quarterly basis, as per the agreement. Higher the compounding higher will be the returns earned. Below mentioned is the formula to calculate the amount earned with compound interest:

A = P(1+R/n)nt

Where ‘P’ stands for the principal, ‘n’ stands for the number of times compounding is done and‘t’ stands for the loan term.

Simple Interest vs Compound Interest:

Simple Interest

Compound Interest

Charged only on principal

Charged on the loan amount along with interest

Is a small portion of principal

A small percentage of principal and simple interest earned

Returns are lower

Returns are higher

Wealth growth is lower

Wealth growth will be higher

Principal remains constant

Principal increases with time

Types of Banks

The Reserve Bank of India (RBI) is the central bank of India, established in 1935, as per the Reserve Bank of India Act. RBI makes monetary policies to create financial stability in India and is responsible of regulating the country's currency, banking sector and other banking operation including credit system. RBI has classified banks as follows:

1. Public Sector Banks: These are the banks in which the Central Government of India holds majority of the stake (51%). The Government of India is responsible for administering the operations of these banks. There are currently 27 Public Sector Banks in India:

  • State Bank of India
  • IDBI
  • Bhartiya Mahila Bank
  • PNB
  • BOI
  • CBI
  • Canara Bank
  • UCO Bank
  • United BOI
  • IOB
  • Dena Bank
  • Allahabad Bank
  • Bank of Maharashtra
  • Syndicate Bank
  • Indian Bank
  • BOB
  • Union Bank of India
  • New Bank of India
  • Vijaya Bank
  • Corporation Bank
  • Oriental Bank of Commerce
  • Punjab and Sindh Bank
  • Andhra Bank

ii) Private Sector Banks: These are the banks in which a private entity holds majority of the stake. Following are the list of private sector banks in India:

Bank Name

Axis Bank

Bandhan Bank

Catholic Syrian Bank

City Union Bank

DCB Bank

Dhanlaxmi Bank

Federal Bank

HDFC Bank

ICICI Bank

IndusInd Bank

IDFC First Bank

Jammu & Kashmir Bank

Karnataka Bank

Karur Vysya Bank

Kotak Mahindra Bank

Lakshmi Vilas Bank

Nainital Bank

RBL Bank

South Indian Bank

Tamilnad Mercantile Bank Limited

Yes Bank

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iii) Regional Rural Banks:  Regional Rural Banks generally operate in rural areas of India. These banks are usually sponsored by a Public Sector Bank.

SI No

Name of Regional Rural Bank & Website Link

Sponsor Bank

State

1

Allahabad UP Gramin Bank

Allahabad Bank

Uttar Pradesh

2

Andhra Pradesh Grameena

State Bank of India

Andhra Pradesh

Vikas Bank

3

Andhra Pragathi Grameena Bank

Syndicate Bank

Andhra Pradesh

4

Arunachal Pradesh Rural Bank

State Bank of India

Arunachal Pradesh

5

Assam Gramin Vikash Bank

United Bank of India

Assam

6

Bangiya Gramin Vikash Bank

United Bank of India

West Bengal

7

Baroda Gujarat Gramin Bank

Bank of Baroda

Gujarat

8

Baroda Rajasthan Kshetriya Gramin Bank

Bank of Baroda

Rajasthan

9

Baroda UP Gramin

Bank of Baroda

Uttar Pradesh

Bank

10

Bihar Gramin Bank

UCO Bank

Bihar

11

Central Madhya Pradesh

Central Bank of India

Madhya Pradesh

Gramin Bank

12

Chaitanya Godavari Grameena Bank

Andhra Bank

Andhra Pradesh

13

Chhattisgarh Rajya Gramin Bank

State Bank of India

Chhattisgarh

14

Dena Gujarat Gramin Bank

Dena Bank

Gujarat

15

Ellaquai Dehati Bank

State Bank of India

Jammu & Kashmir

16

Gramin Bank of Aryavart

Bank of India

Uttar Pradesh

17

Himachal Pradesh Gramin Bank

Punjab National Bank

Himachal Pradesh

18

J&K Grameen Bank

J&K Bank Ltd.

Jammu & Kashmir

19

Jharkhand Gramin Bank

Bank of India

Jharkhand

20

Karnataka Vikas Grameena Bank

Syndicate Bank

Karnataka

21

Kashi Gomti Samyut Gramin Bank

Union Bank of India

Uttar Pradesh

22

Kaveri Grameena Bank

State Bank of India

Karnataka

23

Kerala Gramin Bank

Canara Bank

Kerala

24

Langpi Dehangi Rural Bank

State Bank of India

Assam

25

Madhyanchal Gramin Bank

State Bank of India

Madhya Pradesh

26

Madhya Bihar Gramin Bank

Punjab National Bank

Bihar

27

Maharashtra Gramin Bank

Bank of Maharashtra

Maharashtra

28

Malwa Gramin Bank

State Bank of India

Punjab

29

Manipur Rural Bank

United Bank of India

Manipur

30

Meghalaya Rural Bank

State Bank of India

Meghalaya

31

Mizoram Rural Bank

State Bank of India

Mizoram

32

Nagaland Rural Bank

State Bank of India

Nagaland

33

Narmada Jhabua Gramin Bank

Bank of India

Madhya Pradesh

34

Odisha Gramya Bank

Indian Overseas Bank

Odisha

35

Pallavan Grama

Indian Bank

Tamil Nadu

Bank

36

Pandyan Grama Bank

Indian Overseas Bank

Tamil Nadu

37

Paschim Banga Gramin Bank

UCO Bank

West Bengal

38

Pragathi Krishna Gramin

Canara Bank

Karnataka

Bank

39

Prathama Bank

Syndicate Bank

Uttar Pradesh

40

Puduvai Bharthiar

Indian Bank

Puducherry

Grama Bank

41

Punjab Gramin Bank

Punjab National Bank

Punjab

42

Purvanchal Bank

State Bank of India

Uttar Pradesh

43

Rajasthan Marudhara Gramin Bank

State Bank of India

Rajasthan

44

Saptagiri Grameena

Indian Bank

Andhra Pradesh

Bank

45

Sarva Haryana Gramin Bank

Punjab National Bank

Haryana

46

Sarva UP Gramin Bank

Punjab National Bank

Uttar Pradesh

47

Saurashtra Gramin Bank

State Bank of India

Gujarat

48

Sutlej Gramin Bank

Punjab and Sind Bank

Punjab

49

Telangana Grameena Bank

State Bank of India

Telangana

50

Tripura

United Bank of India

Tripura

Gramin Bank

51

Utkal

State Bank of India

Odisha

Grameen Bank

52

Uttar Banga Kshetriya Gramin Bank

Central Bank of India

West Bengal

53

Uttar Bihar Gramin Bank

Central Bank of India

Bihar

54

Uttarakhand Gramin

State Bank of India

Uttarakhand

Bank

55

Vananchal Gramin Bank

State Bank of India

Jharkhand

56

Vidharbha Konkan Gramin Bank

Bank of India

Maharashtra

iv) Foreign Banks: These are the banks that have to follow rules and obligations of both the host country and home country.

SI N0

 Bank Name

Home Country

1

AB Bank Ltd

Bangladesh

2

ABN Amro Bank

Netherland

3

American Express

USA

4

Bank of Nova Scotia

Canada

5

Barclay’s Bank

UK

6

BNP Paribas Bank

France

7

China Trust Commercial Bank

Taiwan

8

CITI Bank

USA

9

Credit Agrihole Corporate Investment Bank

France

10

Credit Suisse AG

Switzerland

11

CTBC Bank

Taiwan

12

DBS Bank

Singapore

13

Woori Bank

South Korea

14

Westpac Banking Corporation

Australia

15

United Overseas Bank Ltd

Singapore

16

UBS AG Bank

Switzerland

17

Royal Bank of Scotland

Scotland

18

Deutsche Bank

Germany

19

Sumitomo Mitsui Bank

Japan

20

First Rand Bank

South Africa

21

Standerd Charted Bank

UK

23

The Bank of Tokyo-Mitsubishi UFJ, Ltd

Japan

24

Sonali Bank

Bangladesh

25

The Bank of Tokyo-Mitsubishi UFJ, Ltd

Japan

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v) Cooperative Banks: These banks work on no-profit no-loss basis; aiming to serve entrepreneurs, small businesses, industries and self employed individuals in urban areas. In rural areas, they mainly aim at financing agricultural activities like farming, livestock and hatcheries.

vi) Payment Banks: These banks are conceptualized by the RBI. These banks allow customers to transact up to Rs 1 Lakh. They offer services like debit card and net banking.

  • Airtel Payments Bank
  • Aditya Birla Payments Bank
  • Paytm Payments Bank
  • Jio Payments Bank
  • India Post Payments Bank
  • Fino Payment Bank

Types of bank accounts

Basically, there are two types of accounts in India:

i) Demand deposit accounts: Savings banks accounts and current accounts fall under this category. Deposits can be made at any time and hence the ‘demand deposit’ account. Money deposited in a savings bank account earns interest with time. The rate of interest varies across banks. There is no interest for the money deposited in current account due to the liquidity they offer. Table below shows the interest rates offered by popular banks on saving account:

S.No. Banks Minimum Balance required (₹) Rate of Interest (p.a.)
1 Allahabad Bank 1000 3.50%-4%
2 Andhra Bank 0 3.50%-4%
3 Axis Bank 0 3.50%-4%
4 Bank of baroda 0 3.50%-4%
5 Bank of India 0 3.50%-4%
6 Bandhan bank 0 4%-6.55%
7 Bank of Maharashtra 1000 4%
8 Canara Bank 500 4%
9 Central Bank of India 50 3.50%-4%
10 Citibank 200000 3.50%
11 Corporation Bank 0 3.50%-4%
12 Dena Bank 0 4%
13 Dhanlaxmi Bank 0 4%-6.5%
14 Digibank 0 4%-7%
15 Federal Bank 0 3.50%-6.51%
16 HDFC Bank 0 3.50%-4%
17 ICICI Bank 0 3.50%-4%
18 IDBI Bank 500/2500/5000 3.50%-4%
19 IDFC Bank 25000 4%
20 Indian Bank 250 4%
21 Indian Overseas Bank 500/1000 4%
22 IndusInd Bank 0 4%-6%
23 Jammu and Kashmir Bank 0 3.50%
24 Karnataka Bank 0 3.50%-4%
25 Kotak Bank 0 5-6%
26 Lakshmi Vilas Bank 1000 4%-6.50%
27 Oriental Bank of Commerce 0 3.50%-4%
28 Punjab National Bank 500 3.50%-4%
29 Punjab & Sind Bank 500 3.50%-4%
30 South Indian Bank 0 4%
31 State Bank of India (SBI) 0 3.50%-4%
32 Syndicate Bank 0 3.50%-4%
33 UCO Bank 0 3.50%-4%
34 Union Bank of India 0 3.50%-4%
35 United Bank of India 0 3.50%-4%
36 Vijaya Bank 500 3.50%-4%
37 YES Bank 0 5%-6.25%

List Payments Bank Interest Rates and Minimum Balance:

S.No.

Banks

Minimum Balance

Rate of Interest

 

1

Paytm Payments Bank

0

4% per month

 
 
 
 

2

Airtel Payments Bank Ltd.

0

5.5% per annum

 
 
 

3

India Post Payments Bank

0

5.5% per annum

 
 
 

4

FINO Payments Bank Ltd.

1000

4% per annum

 
 
 
 

ii) Term deposit accounts: Fixed deposits, term deposit and reinvestment accounts fall under this category as the money has to be deposited at fixed time intervals for a fixed term.
Below table shows fixed deposit interest rate across popular banks:

Bank

Tenure (Min-Max)

Regular Interest Rates

IDFC Bank

7 days to 10 years

4.00%-8.25%

Lakshmi Vilas Bank

7 days to 20 months 

4.50%-7.50%

DCB Bank

7 days to 10 years

4.00%-7.75%

Ratnakar Bank

7 days to 20 years 

5.00%-7.50%

Deutsche Bank

1 year to 5 years

7.50%-8.25%

Bandhan Bank

7 days to 10 years

3.50%-7.40%

Karur Vysya Bank

7 days to above 3 years

5.00%-7.00%

Tamil Mercantile Bank

15 days to above 3 years

5.00%-7.15%

Karnataka Bank

7 days to 10 years

3.50%-7.30%

HDFC Bank

7 days to 10 years

3.50%-7.25%

IndusInd Bank

7 days to above 5 years

3.50%-7.65%

Oriental Bank of Commerce

7 days to 10 years

5.75%-6.75%

Yes Bank

7 days to 10 years

5.00%-7.10%

Union Bank

7 days to 10 years

5.00%-6.85%

Axis Bank

7 days to 10 years

3.50%-7.45%

ICICI Bank

7 days to 10 years

4.00%-7.25%

IDBI Bank

15 days to 20 years

5.75%-6.85%

Kotak Mahindra Bank

7 days to 10 years

3.50%-7.30%

Vijaya Bank

7 days to above 5 years

5.00%-6.80%

Punjab National Bank 

7 days to 10 years

5.70%-6.75%

Bank of Baroda 

7 days to 10 years

4.25%-6.75%

State Bank of India 

7 days to 10 years

5.75%-6.85%

Jana Small Finance Bank

7 days to 10 years

6.00%-8.50%

City Union Bank

7 days to 10 years

6.25%-7.10%

Personal loan Interest Rate:

Personal loans are the loans offered by banks and financial institutions. Unlike home loans and car loans, funds received on personal loans can be utilized for any reason, and banks have no restriction on the use of funds.

Just like any other loan, personal loans are offered at a certain interest rate. Below table shows the personal loan interest rate across popular lenders in India:

Banks

Interest Rates

Allahabad Bank

8.50% - 13.00%

Andhra Bank

11.55% - 13.20%

Axis Bank

15.75% - 24.00%

Bajaj Finserv

10.99% - 16.00%

Bank of Baroda

11.90% - 16.90%

Bank of India

12.20% - 14.20%

Bank of Maharashtra

11.75% - 12.75%

Canara Bank

11.00% - 14.00%

Central Bank of India

10.85% - 14.35%

Citibank

10.99% - 18.99%

Corporation Bank

12.95% - 13.95%

Dena Bank

13.00% - 14.00%

DCB Bank

12.00%

Federal Bank

11.75% - 14.65%

HDFC Bank

11.25% - 21.50%

HSBC Bank

10.99% - 17.84%

ICICI Bank

10.99% - 18.49%

IDBI Bank

12.00% - 14.00%

IndusInd Bank

10.99% - 16.00%

Jammu & Kashmir Bank

12.40% - 14.40%

Karnataka Bank

12.85%

Karur Vysya Bank

13.50% - 16.00%

Kotak Mahindra Bank

10.99% - 20.99%

Lakshmi Vilas Bank

11.30%

Nainital Bank

11.30% - 14.75%

Oriental Bank of Commerce

11.40%

Punjab & Sind Bank

12.80% - 14.05%

RBL

13.00% - 18.00%

Punjab National Bank

11.30% - 15.05%

SBI

11.05% - 15.45%

Standard Chartered Bank

12.00% - 17.00%

Syndicate Bank

12.40% - 13.65%

UCO Bank

9.85% - 12.85%

United Bank of India

13.45% - 14.20%

Vijaya Bank

12.55% - 13.55%

Yes Bank

Starting at 10.75%

Tata Capital

10.99% - 18.00%

Fullerton India

14.00% - 33.00%

Conclusion

In short, interest is an extra amount payable on the repayment of debt availed. Interest is the cost of debt for the borrowers. Interest is the rate of return for the lenders. Interest enhances the principal of the investment.

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