A committee formed to review the government's savings scheme under the leadership of Shyamala Gopinath, former deputy governor of the Reserve Bank of India who retired on 20 June 2011, has recommended that the interest paid on savings instruments under the scheme, except post office savings accounts, be reviewed annually and benchmarked to government securities of similar maturity periods. To protect investors from large volatility, the rates will not be changed by more than 1 percentage point. Rate for senior citizens' savings scheme will be 1 percentage point higher than comparable government securities. National Savings Certificates (NSCs) will give 0.5 percentage point higher than benchmark securities and other schemes, including PPF, will offer 0.25 percentage point above the benchmark.
Who decides the interest rate?
The interest rates banks charge is mainly based on 3 factors:
1) the interest they’ve been able to charge borrowers
2) the prime interest rate in the country in which the bank is based
3) how aggressive the bank would like to pursue new account holders. Banks compete with each other to attract new savers. You may find a bank that is aggressive in its pursuit of new customers and is willing to pay a higher-than-average rate, and this reducing their margin.
How safe are banks?
Now you wonder what happens if the borrower does not pay back the money. Banks diversify their risk by lending to many borrowers. They know that there will always be some borrowers who don’t pay back in a timely manner. However, the bank will try to reduce this risk by carefully analysing each loan application. And if at the end the borrower does not pay back, the bank will pay for it by compensating with the income from other loans, reducing their profit margin. Additionally, most countries have regulations to protect savers from a bank going out of business. In Europe, up to 100.000€ is protected per person and per bank.
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