Rich individuals and pensioners, who don’t mind keeping their large sum of money in fixed deposits for a fixed term, will get benefit for higher interest by opting without premature withdrawal option. RBI has directed to all banks to offer differential interest rates for fixed deposits by giving the option to choose between term deposits either with or without premature withdrawal facility. It means one should expect that depositors who intend to withdraw a term deposit prematurely will receive a lower rate of interest compared to those who complete the tenure. Unfortunately, this smartly move is not to serve the needs of bank depositors at all, the real purpose of this entire exercise is to help banks in matching the tenure of their assets, or loans, with liability, or deposits, so that they don’t face severe liquidity crunch. However, it would also help those depositors whose deposits having without premature withdrawal facility, if banks offer higher interest on those deposits.

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Limit of Deposit

Although on the pretend of protection the interest of small depositors, RBI has permitted banks to offer all term deposits of individuals held singly or jointly below of Rs15 lakh should, necessarily, have premature withdrawal facility, small 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. It appears that banks would have intention to accept sticky deposits and they will pay more interest those depositors who exercise the option not to prematurely withdraw their deposits. If the deposit is Rs 15 lakh or more, banks can offer differential rates on those deposits but subject to lock in the money for a particular tenure to earn a higher interest, or take the usual rate by retaining the option to break the deposit. However, banks would disclose in advance on differential rates of interest payable on deposits and ensure that the interest rates offered are reasonable, consistent, transparent and available for supervisory review or scrutiny as and when required.

Double Whammy

So far, generally the banks tend to penalize depositors with a penalty of 0.50% to 1.00% per annum who withdraw their deposits before maturity. After moving new guidelines, while keeping continue with these penalties the depositors who opt the facility of premature withdrawal will get, now lower interest rate than those who opt for without premature withdrawal facility. 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. However, the absence of premature withdrawal facility does not mean that they cannot raise a loan on the security of those deposits, to meet their unforeseen needs, and banks will remain continue to grant loans to individual depositors against the security of their own term deposits, as they presently have been doing for all depositors.

Despite the fact that banks cannot survive without the support and patronage of depositors, they 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. In short, RBI should review the rules of deposits, with or without premature withdrawal facility.

 

 

 

 

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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