ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Does Competition among Banks Favour Customers on Interest Rates?

The freedom of banks to set lending rates and almost all deposit rates has ended up in a situation where, since the mid-1990s, the latter have fallen far more sharply than the former. The result is that while savers now earn interest only a little higher than the inflation rate, for most borrowers the costs of bank finance remain stubbornly high. Competition has not led to any reasonableness in banks? behaviour in setting rates of interest on deposits and loans. The situation calls for greater intervention by the central bank, which apart from moral suasion, needs to prescribe a definitive spread over the prime lending rate.

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