Banking
Bank FDs with no premature withdrawal
The RBI has fixed Rs15 lakh as a minimum amount for FDs that cannot be withdrawn prematurely and will fetch higher interest. This is arbitrary and unfair 
 
Last week, Reserve Bank of India (RBI) permitted banks to offer differential interest rates on deposits based on whether the term deposits are with or without premature withdrawal facility subject to the following four conditions:
 
i. All term deposits of individuals (held singly or jointly) of Rs15 lakh and below should, necessarily, have premature withdrawal facility.
 
ii. For all term deposits other than (i) above, banks can offer deposits without the option of premature withdrawal as well. However, banks that offer such term deposits should ensure that at the customer interface point, the customers are, in fact, given the option to choose between term deposits either with or without premature withdrawal facility.
 
iii. Banks should disclose in advance the schedule of interest rates payable on deposits i.e. all deposits mobilised by banks should be strictly in conformity with the published schedule.
 
iv. The banks should have a Board approved policy with regard to interest rates on deposits including deposits with differential rates of interest and ensure that the interest rates offered are reasonable, consistent, transparent and available for supervisory review/ scrutiny as and when required.
 
Unfortunately, these guidelines are so scanty and perfunctory, that they do not serve the needs of bank customers at all. By putting the first condition that all term deposits of individuals of Rs15 lakh and below should necessarily have premature withdrawal facility, majority of bank depositors are completely deprived of the benefit of higher interest rate expected on those deposits without premature withdrawal facility, though they are willing to abide by this condition.   
 
Apparently RBI seems to have protected the interest of small depositors by imposing this first condition, but in reality, the central bank has prevented small depositors from benefiting from the higher rate of interest expected on those deposits without premature withdrawal facility. RBI should have allowed the banks to offer both types of deposits to all leaving the choice to the depositors, as it would have certainly helped those who are prepared to lock in their deposits for long periods without the facility of premature withdrawal. 
 
The real purpose of this entire exercise of having dual type of deposits is to help banks in their asset-liability management, which in turn would help the depositors also, if banks offer higher interest on those deposits without premature withdrawal facility.  
 
The absence of premature withdrawal facility, however, does not and should not mean that they cannot raise a loan on the security of those deposits, to meet their unforeseen needs, and banks will have to permit lending against the security of their own deposits, as they presently do, for all depositors. RBI should make this clear in their guidelines as it is the safest lending operation for all the banks.  
 
The banks in general levy a penalty of 0.50% to 1.00% per annum when the depositors withdraw their deposits before maturity. Now that the depositors who opt for this facility of premature withdrawal will get lower interest rate than those who opt for without premature withdrawal facility, it is but fair that the former should not be charged any penalty when they wish to withdraw the deposits before its due date. In fact, those who prematurely withdraw their deposits will be entitled to only the rate of interest applicable for the period for which the deposit has remained with the bank, which is definitely lower than the originally contracted rate. Hence levying a penalty over and above such lower rate, would amount to double whammy for those who withdraw their deposits before maturity due to unforeseen and under compelling circumstances.
 
In short, RBI should rewrite the rules of deposits, with or without premature withdrawal facility, preferably as under:
 
1. For all term deposits banks can offer deposits without the option of premature withdrawal as well. However, banks that offer such term deposits should ensure that at the customer interface point the customers are, in fact, given the option to choose between term deposits either with or without premature withdrawal facility.
 
2. The interest rate offered on those deposits, which do not have the facility of premature withdrawal, should necessarily be higher than that offered on those deposits of the same tenor with the facility of premature withdrawal, so as to offer an additional benefit/incentive for those who have opted not to withdraw the deposit before maturity. 
 
3. The banks, however, should continue to grant loans to individual depositors on the security of their own term deposits as hither to, irrespective of whether such deposits are with or without premature withdrawal facility. And the terms and conditions of granting loans against their own deposits should be made clear in advance at the time of accepting the deposits by banks. 
 
4. Those individual depositors who opt for deposits with premature withdrawal facility should not be charged any penalty if and when they withdraw their deposit before maturity in view of their having accepted lower interest rate on such deposits. 
 
5. Banks should disclose in advance the schedule of interest rates payable on deposits i.e. all deposits mobilised by banks should be strictly in conformity with the published schedule.
 
6. The banks should have a Board approved policy with regard to interest rates on deposits and loans there against, including deposits with differential rates of interest and ensure that the interest rates offered are reasonable, consistent, transparent and available for supervisory review/scrutiny as and when required.
 
Banks do not exist without the support and patronage of depositors, who provide the stock in trade for banks to lend and make profit out of the hard-earned savings of the public. Despite this, bank depositors are often discriminated against and are not treated fairly both by the banks and the regulator. For instance, RBI has prohibited levying of penalty on pre-payment of housing loans, but the depositors are not given this benefit when they withdraw the deposit before maturity.
 
Now that banks will accept deposits with or without premature withdrawal facility, this is the right time for RBI to instruct banks to waive levying of penalty on those deposits which have premature withdrawal facility as the interest rate offered to them would be lower than those deposits without premature withdrawal facility. 
 
(The author is a banking analyst and he writes for Moneylife under a pen name ‘Gurpur’.

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COMMENTS

atul shah

2 years ago

If no penalty for premature encashment of bank deposit is levied,
that investment is money at call...
Banks do satisfy your above expectation by offering saving bank a/c... Why Bank shall offer higher rates than s/b rates for FD having any time exit option at nil penalty?

SUNIL KUMAR HEMNANI

2 years ago

Here is a situation wherein a customer wonders if the RBI is looking after his interests at any stage .The fact of the matter is ever since Mr Rajan has taken over the question you have got ask yourself is "Does he have any intention in looking after the customer " .The ATM number of withdrawals was another such issue.The limitations is another factor to make you consider he is not bothered about small customers.

Anand Doctor

2 years ago

Kudos to "Gurpur" for highlighting the lacunae in the new FD rules and suggesting sensible, implementable solutions.

As an aside, I wonder if Debt funds would now become more poplular with retail investors investing Rs. 15 lakhs or less - as these funds provide immediate liquidity, that FDs now won't...

Farmed land, food per person declined over 25 years

Key problems with agriculture in India are related to low yields and production. Accordingly, Foodgrain availability also declined from 471.8 grams per capita to 453.6 grams per capita over the last four decades

 

The land available for farming in India, already under decline, is feared to drop further with the Bharatiya Janata Party (BJP)-led government trying to push through a controversial bill that is being criticised in the present format by a host of opposition parties, led by the Congress.
 
The most controversial change proposed is the exemption of five categories of projects - industrial corridors, public-private partnership projects, rural infrastructure, public housing and defence projects - from getting the consent of 70 percent farmers of the area.
 
This is worrisome since cultivated land on India’s farms declined 15 percent over the past 25 years, according to government data analysed by IndiaSpend, reducing foodgrain production and portending new pressures as more land is set to be acquired for industries.
 
While the net sown area includes orchards and crops, the cultivated area covers only crops. Land sown with crops declined from nearly 87 percent in 1987-88 to 72 percent in 2011-12.
 
IndiaSpend’s recent reports have been focusing on the farm crisis in India with case studies of Bundelkhand farmers. It has also reported on the decline in farmers across India.
 
Reasons for the decline in cultivated land include a drop in households owning land in rural India and a decline in the proportion of households dependent on manual labour and farming, says a study by the Foundation for Agrarian Studies, using data from the National Sample Survey Organisation (NSSO) of the Ministry of Statistics and Programme Implementation.
 
To analyse how the drop in cultivated area has affected India’s food sufficiency, availability of foodgrains (cereals and pulses) was matched with the decrease in cultivated land. The decline is clear.
 
Key problems with agriculture in India are related to low yields and production. Accordingly, Foodgrain availability also declined from 471.8 grams per capita to 453.6 grams per capita over the last four decades.
 
But there is a saving grace: Yield. This has been improving over the decades - from 1,023 in kg per hectare in 1980-81 to 2,101 in kg/ha in 2013-14 for food grains, as per data published in the official Economic Survey.
 
For oil seeds it was from 532 kh/ha to 1,153 kg/ha and for cotton from 152 kg/ha to 532 kg/ha. 
 
So, foodgrain yield has almost doubled between 1980-81 and 2013-14, while oilseeds and cotton have also witnessed an increase of 116 percent and 250 percent in yields respectively.
 
Despite its fluctuating farm fortunes, India is among the world’s top producers of food crops, according to the United Nations Food and Agriculture Organization. But it its yields across the spectrum of agricultural products are low.
 
In cereals, for example, it is the third largest producer in the world, and in terms of the yields of top five producers, though, the country ranks fifth. For coarse grains, the ranking is fourth and ifth, respectively. 
 

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COMMENTS

B. Yerram Raju

2 years ago

Thank the farmer who is producing twice the quantum in the midst of regulations from twelve ministries in the Union and at least six in the State strangulating him!!
The Bill should restrict the exemptions only to Defence and classified industrial corridors and this classification should be specified by a gazette notification from States as priorities differ from state to state.

Mumbai plotter Headley joined LeT 'full time' after 9/11
David Coleman Headley makes the disclosure in a draft memoir made available to the makers of an 'American Terrorist', a TV documentary telecast Tuesday night
 
A Pakistani-American key plotter of the November 2008 Mumbai terror attacks has revealed that he decided to join Pakistani terror group Lashkar-e-Taiba (LeT) "full time" following the 9/11 attacks in the US.
 
Born Daood Gilani in the US to an American mother and a Pakistani father, David Coleman Headley makes the disclosure in a draft memoir made available to the makers of an "American Terrorist", a TV documentary telecast Tuesday night.
 
Working with LeT, Headley, former drug smuggler turned informant for the US Drug Enforcement Administration, used his US passport to travel to India, scout locations for the plot, film them and even find a landing site for the plot's attackers.
 
Writing about his first encounter with Lashkar militants, Headley, who is serving 35 years for his role in the Mumbai attack, describes how he was "very impressed with their dedication to the cause of the liberation of Kashmir from Indian occupation."
 
Headley's memoir offers a unique window into his turn toward extremism, his training with LeT and his preparations for an abortive attack on a Danish newspaper for publishing cartoons of the Prophet Muhammad, according to report by ProPublica and Frontline.
 
In one passage, Headley, who frequently visited Pakistan, writes: "On one of my trips, October 2000, I made my first contact with Lashkar-e-Taiba (LeT), quite by accident. I attended their annual convection in November.
 
Marking his decision to join Lashkar "full time" following the 9/11 attacks, Headley says that by 2002 the group asked him to take "the Daura Aamma, the basic military training course offered by LeT."
 
It was one of several training programmes he writes about, the report says noting "by 2005, Lashkar's plans for Headley are coming into focus."
 
"He is trained in explosives, but perhaps most importantly, Lashkar asks him to change the name given to him at birth by his Pakistani father and American mother - Daood Gilani."
 
"He chooses David, which is English for Daood; Coleman, which was his grandfather's name; and Headley, which was his mother's maiden name," the report said.
 
It was a bureaucratic act, but intelligence officials cited by the report say the change made Headley that much more difficult to track.
 
"Finally, in June, my immediate superior, Sajid Mir, instructed me to return to the United States, change my Muslim name to a Christian sounding name and get a new US passport under that name," he writes.
 
"He now informed me I would be going to India, since I looked nothing like a Pakistani in appearance and spoke fluent Hindi and Urdu it would give me a distinct advantage in India," Headley added.
 
Around the same time, Headley was conducting regular reconnaissance of targets in Mumbai.
 
On one trip, he checked into the Taj Mahal Palace Hotel, which would later be the epicentre of the Mumbai attack, with his new wife for a "honeymoon."
 
The plan was to capture an Indian fishing vessel, which constantly strayed into Pakistani waters, and commandeer it all the way to Mumbai.
 
"The hope was that the Indian Coast Guard would not notice an Indian vessel. The boys would carry a GPS device which would guide them directly to the landing site, I had selected earlier," he writes.
 
After the attack, Headley says he was told to "lay low." Instead, he travelled to Denmark to scout the Jyllands-Posten newspaper for a possible strike.
 
But western intelligence soon learn of the plot, and close in on Headley. He was arrested on October 3 2009 at O'Hare Airport,Chicago on his way back to Pakistan.
 

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