What a myth that interest rates in India are set by RBI. Bull. Int rates are set by supply and demand of money. So a Tata Power will be able to borrow at a much finer rate than say an Adani power – assuming that both are rated AA+. This is true all over the world.

Who fixes interest rates? The rating agencies? the banks? the government? No. It is the market perception of the borrower that decides the rates. The govt of India is the biggest and perhaps the most inefficient borrower in the country. If they just convert the National Savings Certificates into demat mode, they will collect far, far greater amount of money.

The Pension regulator fights with the govt to get a higher rate for your Pension schemes. So a man earning Rs. 2 crores contributes Rs 20L to his voluntary pension plan and gets INTEREST OF 8.55% PA free of all taxes. EEE. If the govt was to reduce this to 5%…this man has no choice but to put it there. Remember NS is taxing this man at 43%….so NS can say…”see we have no choice..” This man also has no choice.

Now we actually do not know the “rates” at which people borrow. When ILFS and Icici were both borrowing..i saw a 200 bps difference. And you know who was borrowing at 9% p.a. and who was borrowing at 7% p.a.

As long as our powers that be do not let all lenders and all borrowers in one market (ike Nse) we can only guess about “at what rate each borrower is borrowing”. If you are analyzing a bank (Nbfc) balance sheet, look at the Interest paid (by whatever name called). If that is less (and falling) the b/s you are seeing is a darling company.

Intellectuals commenting about the small saver getting high interest in Post office schemes are the same ones who are getting 8.1% on the voluntary PF, tax free. Ironic is it not?

I speak to a builder who constantly borrows at rates between 13-15% p.a. If he requires at higher rate, he realizes that his project will not make money. So rarely does he even go to 16%! I do not think he can get money at 9% Рhe is not rated and he is not keen to do paper work to borrow from a bank. So I can easily lend him say Rs. 2 crores Рat 13% p.a. Рand I will have the papers of a house  (mortgage by deposit of title deeds).  No, he does not read the papers, he does not watch the ticker channels.

We do not have any method of even knowing what are the rates at which people borrow – in the unofficial markets. See how many communities like the Kutchies, Shettys, etc. borrow – a group collects money say Rs. 2L per person per month – and 20 people. So every month the kitty is Rs. 40L and this could be a 24 month kitty. This becomes the corpus for somebody who wants working capital or the starting fund for a new hotel! The implied interest in this is about 8-9% p.a. Not bad at all.

Do we even know how many small money lenders lend at rates FINER THAN BANKS?

We just do not have enough data about our debt market. We have no clue whether our banking industry matters enough.

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  1. This is a specific problem of the general malaise in India. All round Opacity (and its corollary: Shortage of Trust). RBI tries to set interest rates that are public information, but there is too much going on in the sidelines to ensure that the RBI figures are irrelevant. And in the sidelines are the ‘insiders’ or ‘favoured people’ and they want to keep things that way. Nobody wants to work in a transparent manner (and if anyone tries to, he’s the butt of ridicule).

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