In your interest.
Online Personal Finance Magazine
No beating about the bush.
Here is a real-life story of legal heirs of a deceased, who successfully managed to claim a matured fixed deposit along with compound interest after 15 years
What happens when someone, in absence of a nominee, dies before the fixed deposit is matured? Most of the times, the legal heirs are clueless as to what assets the deceased held and the process to deal with claiming the same from financial institutions. One of our readers brought to us an interesting case.
A family had found out about the deceased assets, in this case—a fixed deposit (FD) with Syndicate Bank, only after 15 years, while combing through the last remnants of a trunk left in their attic. This situation is quite common not just in India but all over the world.
So what happens to the fixed deposit in such a case?
The simple case would be that the assets would be transferred to the nominee. However, we learn that, in the 1970s, nomination facilities weren’t readily available. In fact, one had to ask for it. Thus the deceased was probably not aware of such a facility. Moreover, the family wasn’t aware that the deceased held a FD.
Usually, Syndicate Bank would have to notify the depositor, whether alive or dead, on the maturity of the FD. In some cases, these letters go unnoticed as there may not be anyone residing after death and the relatives might be living elsewhere.
We found out that according to RBI: “If the letters are returned undelivered, they may immediately be put on enquiry to find out the whereabouts of customers or their legal heirs in case they are deceased.”
Therefore, if the bank does not hear from the depositor for a period of time, it must use whatever methods at disposal to track down its legal heirs.
When this family found out about the existence of the FD, they approached Syndicate Bank in order to claim the FD, along with stipulated interests. However, the family was “bullied” by the Bank for not taking measures to claim the FD at time of death of the depositor. What was surprising was that the deceased lived one floor below Syndicate Bank’s office! The Bank might have been aware of the death of the depositor, but had not bothered to track and inform the legal heirs of the same. Instead, they had virtually used the depositor’s FD for “free”.
This isn’t the only peculiarity with FDs and death before its maturity. We learn that there’s another issue—the question of how much the legal heirs are entitled to the interests and FDs.
According to Syndicate Bank: “....In the case of death of the depositor after the date of maturity of the deposit, the bank shall pay interest at savings deposit rate obtaining on the date of maturity from the date of maturity till the date of payment.”
The logic in this case is that the fixed deposits had matured when depositor died, and thus Time Deposit had become Demand Deposit (i.e. savings bank). Therefore, if the FD is not claimed within due time, it will be converted to a savings bank account and only the savings rate would apply henceforth.
However, it is different in case the depositor dies before maturity, as in this case, “In the event of death of the depositor before the date of maturity of deposit and amount of the deposit is claimed after the date of maturity, the Bank shall pay interest at the contracted rate till the date of maturity. From the date of maturity to the date of payment, the Bank shall pay simple interest at the applicable rate obtaining on the date of maturity, for the period for which the deposit remained with the Bank beyond the date of maturity; as per the Bank's policy in this regard.”
The key word here is “simple interest at the applicable rate”. What does the simple interest means? Is it savings rate? Or a rate decided by the bank without the knowledge of the depositor’s legal heirs? The wording used here gives the bank the freedom to choose whatever rate it prefers, which will be usually less than the contracted rate.
Syndicate Bank had offered the legal heirs savings rate instead of the contracted rate, thus trying to fleece its customers.
What do we learn from this episode?
Simple, customers are taken for granted by the banks. Most of the times, the customers are short-changed without their knowledge, even in the simplest of cases. In this case, the Bank failed to take cognizance the fact that the FD was taken in the 1970s, where rules and banking practices were different then. It is the bank’s duty and responsibility to ensure that common sense be applied to cases such as these and adapt it accordingly within the framework today in such a manner that is fair to the legal heirs.
Also, there ought to be a solution to communicate better to the legal heirs of the deceased, which would not only make the bank’s job of tracking down legal heirs much easier, but also serve customers better. While the employees of Syndicate Bank in the 1970s and 1980s may have failed in their duties, the bank had no right to bully the legal heirs because of some lapse of its own employees many years ago.
Fortunately, despite all this, we learn that the legal heirs have managed to obtain a succession certificate as well as a court order stating that Syndicate Bank must pay compound interest at the contracted rate, but only after a lot of hard work done by them.
The Reserve Bank of India has recently deregulated interest rates on NRE rupee deposits which are beneficial to NRIs who wish to deposit their surplus funds with banks in India. There are, however, some caveats that NRIs should remember before investing in bank deposits in India
The Indian rupee has been depreciating for the last several weeks and from around Rs44 to a dollar, it has now reached a level of around Rs53 and is hovering in the range of Rs52 and Rs54 to a dollar at present. This nearly 20% depreciation of the rupee has proved to be a blessing in disguise for the non-resident Indians (NRIs), as they not only get more rupees for their dollars, but also higher tax-free interest on their non-resident external (NRE) rupee deposits, now that Reserve Bank of India (RBI) has deregulated interest rates offered by banks on NRE rupee deposits.
With the burgeoning foreign exchange reserves of the country, the rates of interest payable by banks on NRE deposits till recently were regulated by the RBI and it was linked to London Inter-Bank Offered Rate (LIBOR). So the rate offered by banks on NRE rupee deposits were as low as 3% to 4% per annum and the banks had no freedom to offer anything higher than these regulated rates.
With the recent sharp depreciation of the rupee, the RBI has taken a series of steps not only to stem the fall, but also to attract foreign currency into the country. One of the steps taken by RBI is to deregulate interest rates offered on NRE rupee deposits, and many banks in India have consequently during the last few days increased the interest rates on NRE rupee deposits to as high as 10% p.a. for fixed deposits of tenor varying from one to two years.
Let us go to the basics first. At present NRIs can place their surplus funds with banks in India in three different ways.
1. NRIs at the time of emigration to a foreign land would have had some savings with them. Besides even after becoming a non resident, they would be receiving interest, dividends, etc, on their earlier investments, or rent from their property owned by them but now leased out in India. All these funds can be deposited with banks in India in what is called as non-resident ordinary savings accounts (NRO). In fact, the savings bank accounts held by residents after they leave India on employment, etc, gets renamed as NRO accounts in which the NRIs can continue to deposit their local funds originated in India. These surplus funds can be invested in fixed deposits with banks, and they are also called as NRO deposits. These funds having originated in India are normally not repatriable without prior permission from the RBI. But now the RBI has allowed repatriation of these funds up to certain limits (presently up to $1 million a year) and subject to certain conditions. Besides, the interest earned on these NRO accounts is subject to tax deduction at source at a flat rate of 30.9%. NRIs whose total taxable income in India is less than the basic exemption available to individuals under the Income Tax Act can get back this TDS deducted as refund if they file their tax returns in India.
2. The second type of bank deposits allowed in India for NRIs is called NRE deposits. These are called non –resident external accounts, because the funds for opening and maintaining these accounts are required to be remitted from abroad as free foreign exchange. These funds received in foreign currency are converted into rupees and credited to either NRE SB account or NRE fixed deposit accounts of NRIs. The best advantage of the NRE accounts is that these funds along with the interest earned on these funds are fully re-patriable to a foreign country of their choice without any restrictions, whenever required by the depositor. Besides the interest earned on these deposits is totally free from Indian income tax.
3. The third type of bank deposits permitted for NRIs is in the form of foreign currency and they are called Foreign Currency Non Resident (FCNR) deposits. They can be kept in any currency which is freely convertible as defined in Foreign Exchange Management Act (FEMA), namely, US dollar, Canadian dollar, British pound, Euro currency, Japanese yen, Australian dollar, etc. They carry interest at the rates regulated by the RBI and linked to LIBOR and is fixed in the beginning of each month as per the procedure prescribed by the RBI. These deposits with interest are also freely re-patriable and the interest earned in the respective currencies on these deposits is also free from Indian income tax.
The interest rates offered by different banks for all the three type of deposits are subject to change and hence NRIs are advised to ascertain the rates offered by banks by visiting the website of their preferred bank before making investments in India. They can certainly shop for best rates available and decide on the bank most suitable having regard to their convenience and the quality of service rendered by the bank. What is liberalized by RBI last week was that it allowed banks the freedom to fix interest rates on NRE rupee deposits which was hitherto regulated and linked to LIBOR. The rates of interest for NRO fixed deposits were freed earlier and each bank is, therefore, now free to quote their own rates for both these type of deposits, subject to the condition that these rates cannot be higher than those offered by them on comparable domestic rupee deposits to Indian residents.
In order to facilitate smooth banking operations for NRIs in India, the RBI has recently permitted following facility to NRIs who wish to bank in India. With effect from 22 September, 2011, NRIs are permitted to open NRE/FCNR accounts with their resident close relative ( close relative as defined in Section 6 of the Companies Act, 1956) on former or survivor basis. The resident close relative shall be eligible to operate the account as a Power of Attorney holder in accordance with the extant instructions during the life time of the NRI/PIO account holder.
There are, however, four caveats mentioned below that the NRIs should remember before investing in bank deposits in India.
1. NRE and NRO deposits, being denominated in Indian rupees, are subject to exchange risk. The rate of exchange being volatile and since nobody can predict the future, the Indian rupee can depreciate or appreciate depending upon the conditions of our country’s economy as well as the global economy. Therefore, when these funds are to be repatriated abroad on a future date, the exchange rate prevailing then will be applicable which may result in capital loss or profit. In short, the exchange gain or loss will be squarely on the shoulders of the NRI depositor.
2. Though income earned on NRE and FCNR deposits at present is tax-free in India, it may be taxable in the country where the NRIs live and they should, therefore, consult their tax advisor in the country of their residence to be clear about the tax implications of investing in India. There are certain double taxation avoidance treaties between India and many countries of the world, which may mitigate the tax burden to some extent, but this can best be ascertained from the tax advisor before investing in India.
3. The rules of investment in India by NRIs are framed by the RBI under the Foreign Exchange Management Act and with regard to tax by Government of India under Indian Income Tax Act and they are, therefore, subject to change from time to time. NRIs are advised to consult their financial advisor for any clarifications in this matter.
4. The chances of commercial banks in India going bust are remote, if past experience is any indication. Whenever any commercial bank is tottering, the RBI normally wears the hat of a marriage counselor and arranges to marry or merge a weak bank with a strong one, so that the depositors do not lose money, though shareholders may or may not get their full investment. But the same can not be said of co-operative banks.
(The author is a banking & financial consultant. He writes for Moneylife under the pen-name ‘Gurpur’)
The RBI says that the competition in this space, which was non-existent earlier, could rise as banks with lower CASA ratio could rush to gain such deposits by raising rates
The Reserve Bank of India (RBI), in its Financial Stability Report (FSR) for December 2011, warns that competition among the banks to offer higher interest rate on saving accounts could put pressure on banks’ margins.
According to the apex bank “The impact of such rate hikes on banks’ profitability will need to be monitored carefully as already the banks’ cost of funds have gone up and such rate hikes will put additional strains on banks’ net interest margin.”
It further added that the effect, however, may be muted, based on the churn in customers and cost structures adopted by individual banks. A corollary to the event would be that in a falling interest rate scenario, saving bank deposits rate may also moderate accordingly.”
The RBI says that the competition in this space, which was non-existent earlier, could rise as banks with lower CASA (current account savings account) ratio could rush to gain such deposits by raising rates.
According to the FSR, a major attraction of saving deposits for banks is that it offers low-cost source of funds, as evident from the fact that banks with higher share of CASA deposits (current account- saving account), of which saving deposits is a major part, enjoy low-cost deposits. CASA deposits are not uniform among the banks.
RBI feels that, “Banks are likely to partially offset the impact of the increase in interest cost by levying transaction and servicing charges and thus pass on the additional cost to the customer.”
The apex on 25 October 2011 deregulated interest rates for savings accounts in banks. Subsequently few banks raised interest rates to 6% on savings accounts compared to the earlier 4%. For instance, private sector player YES Bank raised it up to 6% and recently raised it to 7% per annum on deposits of Rs1 lakh and above.
Kotak Mahindra Bank followed with 6% rate per annum on all savings accounts with balance above Rs1 lakh and IndusInd Bank is offering 5.5% per annum where the balance is below Rs1 lakh and 6% per annum for accounts having more Rs1 lakh.