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Negative Rate of Interest: A Truth Hard to Believe

In India people cannot imagine such a situation where banks pay back to borrowers and charges interest from depositors. But this situation of negative rate of interest is a reality in many parts of the world. It has been there at various times like in Europe, japan etc.

Many question may arise in one’s mind like:-

  1. What is negative rate of interest?
  2. What is its impact on economy?
  3. In what circumstances govt. or central bank of a country takes.

Such step of introduce negative rate interest etc.

To understand the situation we should take these questions one by one:-

Negative rate of interest is a situation when central bank of any country announces rate of interest in such a way that any who borrows money from bank will any back lesser money than the amount borrowed or we can say bank will pay charges or interest to borrowers and vice versa deposits will get back their money at maturity of their deposit and it will be less than the original amount deposited.

These steps has been taken by various government when there is heavy slowdown in economy and government wants that more and more people should invest in business and to increase their purchase power, On the same time the depositors are discouraged by charging money on their deposit instead of paying interest on deposits.

This step is to be taken with due care and with people and well informed control over the economic scene of the country.

It is a very risky situation as if people get interested in investing in economy & business along with increase in their purchasing powers then loans may be much more and deposit level may dip substantially and then bank’s gross earnings will be much less than the interest expenditure to be paid back to borrowers and if the banks incur losses for long time then whole economy may crash.

So it is not desirable situation or we should be happy that negative rate of interest are not there in India. But rate of interest in India are very high so for relief to industry especially MSME these should be reduced.

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