Negative interest rate: What if your bank deducts money rather than giving you interest on your savings?

Despite investing in various instruments like mutual funds, SIP, etc, Indians especially the middle class obsess over interest rates on savings, fixed deposits, and recurring deposits. On the other hand, for a larger group of the lower middle class in the country, these interest rates mean a lot.

The declining interest rates in large commercial banks in India are a concern for many. But did you ever think what if the bank deducts (more like a punishment) for depositing money in your accounts? This policy is mainly developed to discourage people from parking their money in banks.

List of some countries that follow negative interest rate policy:

Switzerland: Since 2014, Switzerland has been punishing its people for saving.

The Swiss National Bank (SNB) punishes its banks for parking funds by imposing negative interest rates. The SNB reported an unchanged benchmark of a three-month Libor of -0.75 per cent on banks, despite pandemic

The same is passed on by the commercial banks to its consumers who are willing to save. Despite these negative rates, the banks make money while the savers lose. The commercial banks offer mortgages with zero / negative interest rates but levy high fee or other charges to make up for the loss. In the case of new customers, who do not wish to be burdened by negative cuts, will end up taking services offered by banks. Here again, banks get paid for those services and customers enjoy those services and no negative interest.

Denmark: While SNB decided not to have any changes made in these rates even during the COVID-19 pandemic, Denmark’s central bank surprised many by lowering its negative interest rate. From the record low of - 0.75 per cent, it now stands at -0.60 per cent.

Denmark’s biggest lender Danske Bank introduced negative interest rates for certain private customers from June 1, 2020. The terms of the negative interest rate is based on the usage of the account by the customer.

Then there is Jyske Bank, Denmark’s third-largest bank, offering borrowers a 10-year mortgage deal at -0.5 per cent. In this case, the bank pays a borrower to take money off their hands, so they pay back less than they have been loaned. While this idea sounds quite amazing, the fee banks’ charge as services can make up for the losses made through such kind of lending. According to Jyske Bank's CEO Anders Dam in 2019, "The negative interest rate environment that has affected the Danish market since the spring of 2012, only interrupted in 2014, now seems to be of a rather permanent nature.”

Sweden: The first central bank to introduce a negative interest rate was Sweden's Riksbank in 2009. However, in 2019, it was the first bank to exit the negative interest rate cut. More or less, the country has seen the negative implication of this policy. One of the issues was that the housing market witnessed property prices doubling in Sweden over the past 15 years. At the peak, the central bank had introduced a cut of -0.75 per cent.

At present, the country is offering around zero per cent interest to its customers. While the country came out of the negative regime, there is a chance it will return to it due to COVID-19-induced gloomy economic conditions.

Japan: In 2016, the Bank of Japan implemented a negative rate. Traditionally, commercial banks lend money to some customers and use the interest from those loans to pay out interest on savings deposits. But when loans are given at lower rates, then it is natural to give lower interest to customers. In the case of Japan, the interest rate is negative to saving account holders.

Sweden started the negative interest rate as an experiment and now it fears long-term repercussions of this. While Sweden exited the negative interest cut policy, other banks continue. However, countries following it have not been able to reach the true potential of such a policy.

The negative interest rate policy was introduced so that borrowers can borrow for cheap and get economic activity going. But the wind did not really blow in that direction.

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