Rate of Interest

In the ordinary language, the term interest refers  to the payment made by the borrower to the lender of the capital for its use . Interest may be paid either monthly, quarterly, half- yearly or yearly.

According to Seligman, interest is the return from the fund of capital Prof. Wicksell defines interest, as “a payment made by the borrower of capital, as a reward for his abstinence.” 

Gross Interest and Net interest

It is usual to make a distinction between gross interest and net interest. The whole of the income received by the lender of capital from the borrower is ‘not’ or ‘pure’ interest is the payment made for the services of capital, while gross interest includes many  other items of payment of which net interest is one of them. 

Administered Rates and Market of interest

If the interest ret is determined by market forces without direct or indirect interference by the government or central bank of the country, it is called market rate of interest. It is a rate prevailing in the money market on a given day. It is influenced by demand for and supply of loanable funds.

Call money Rate

Commercial banks borrowed money from each other for a very short-period say for a day or two. They need cash when there is a sudden demand for cash withdrawals from the current or savings account of the depositors. The rate which is called ‘call money rate’ is determined by forces of demand and supply-mainly by demand and it reflects the influence of market forces. The commercial banks and other financial institution like the UTI,LIC etc.

Administered Rates

Administered rate of interest is a rate fixed by the government or any other financial authority (e.g. central banks) which all other recognised financial institution have to accept. It is called ‘administered rate’ because it come into existence by some administrative order or fiats. In India, Reserve Bank has the powers to fix or alter the rates of interest charged or paid by the commercial banks.      

Why do the administered rates differ ?

Administered rates of interest are like ceiling or floor price of commodities prescribed by the government. These rates would obviously be higher or lower then the market rates. The interest rates on EPF, PPF etc. were maintained at a certain level as a measure of welfare and protecting the interests of retired employees. Similarly, nationalized banks were required to offer higher interest rates on fixed deposits. Thus we find that administered rates differ due to a variety of reasons.