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The RBI has fixed Rs15 lakh as a minimum amount for FDs that cannot be withdrawn prematurely and will fetch higher interest.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’.
Comments
atul shah
7 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
7 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
7 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...
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