INDIA: In a scenario where negative investor sentiment is pulling down stock markets, fixed deposits – the tried and trusted medium – is seeing renewed interest from investors. And cashing in on this are banks and NBFCs, offering innovative products and higher interest rates.
As the cliche goes, the only thing constant is change and so are interest rates. In the last one year, returns on fixed deposits have been revised frequently. From 8%, interest rates have gone up to as high as 11.15%. In such a situation, if you want to switch your existing FD with the new interest rate, you could do so with many banks letting off penalty charges on premature withdrawal. (Penalty charges differ from bank to bank ranging from 0.5% to 2%.)
Banks like IDBI Bank and Kotak Mahindra Bank have done away with levying penalty charges if one breaks the existing FD for creating a new account linked to the revised interest rate. Though this is an incentive to upgrade one’s FD account, bankers point out that one would have to be content with the contracted interest rate for the tenure for which the deposit has been kept with the bank.
To circumvent penalty charges, midsized bank Development Credit Bank (DCB) recently launched DCB Freedom 1-2-3 Scheme, where it offers customers a rate of 10.50% for a 3-year slab. According to its retail banking head Praveen Kutty, there are no charges for early withdrawal after a year, giving flexibility to its customers. According to RBI, bank deposits fell 2.6% to Rs 4.06 trillion, while investments in shares and debentures rose by half to about Rs 771 billion in 2007-08.
NBFCs like HDFC are also aggressively looking to raise public money, but they have a pre-mature clauses in-built in their FD offerings. The housing lender charges 2% on premature withdrawals. “The effective yield that a depositor would earn on premature withdrawal beyond a period of 6 months would be more or less around the same level as that on bank deposits,” said an HDFC spokesperson.
The ‘interest war’ by banks to draw customer interest to their product features, seems to be paying off. Many banks, in fact, are seeing customers increasingly preferring fixed deposits considering that there are not too many safe avenues available for them in this market environment. For example, IDBI’s fixed deposit portfolio has increased by around 8% to Rs 66,000 crore in September from March. State Bank of India, the country’s largest bank, has increased interest rate by 1% to 10.50% for 1,000 days. Kotak Mahindra Bank has made an upward revision on its term deposits that would earn a return of 10.60% per annum for a 390-day period.
