Use auto renewal option to stop FDs from fetching lower interest rate

The Reserve Bank of India’s (RBI) recent ruling says if a Term Deposit (TD) matures and proceeds are unpaid, the amount left unclaimed with the bank shall attract a rate of interest as applicable to savings account or the contracted rate of interest on the matured TD, whichever is lower.

Term deposits are low-risk deposits such as recurring, cumulative, annuity, reinvestment deposits and cash deposits. They are kept with the bank for a fixed tenure. The depositor can withdraw the sum when it is matured, i.e.: after the matured period.

How does the recent RBI ruling affect individual customers? For instance, if customer x invests in a fixed deposit for a five-year tenure, the bank will give him/her an interest rate applicable when the money was deposited with the bank on its maturity. If it was 3 percent and x does not claim it after it has matured, the bank earlier would revert to a rate of interest applicable to savings accounts. Until now, unclaimed deposits attracted the rate of interest applicable to savings deposits which is usually lower than fixed deposit rates.

Auto renewals, overdue deposits

Satish Kumar, Research Analyst, Choice Broking said, the circular does not pertain to auto-renewals at all. “When a customer does not withdraw or give any instruction to the bank after the maturity of the deposit (usually a couple of months late), then it is considered overdue deposits. The new rule is applicable for unclaimed deposits where depositor doesn’t make any transaction in the account for 10 years or more," he said.

What can customers do?

Dr M Narendra, Adviser, Enqube Collaboration-a think tank, and also former CMD-Indian Overseas Bank (IOB), suggests bank customers be mindful and cautious about their deposits and its maturity date. The bank does send a message regarding the maturity of the account. “So be alert,” he says.

Another option is for customers to click auto renewal when they are opening a fixed deposit, for instance. In such circumstances, the customer will stand to gain interest as earlier.

“There was a guideline earlier which said, if you renew the existing FD for a month or for a shorter period, the bank would sometimes give savings rates and for the balance period the new FD rate.

The repo rate is now 4 percent on account of substantial infusion of liquidity by RBI and more than 115 basis interest rates reduction by the Regulator in the last two years.

Banks have effected substantial reductions in deposit rates and lending rates liquidation, and the bank rate is now at 5 percent. “In such circumstances, there is no need for banks to pay a higher rate of interest which existed when the term deposit was opened and now lies unclaimed. It upsets the economics for the bank. Hence, the RBI notification, interest will be paid whichever is lower, savings rate or FD rate,” Narendra said.

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