With rising interest rates, fixed deposit (FD) investments are a great strategy for building wealth. The coolest thing is that fixed deposits have a variable term, so one can earn handsome returns by placing long, medium and short term deposits. However, when a term deposit account matures, an individual has two options: either withdraw the money and collect the amount at maturity, or renew the deposit for the desired term. However, if one fails to execute either of the two alternatives, the FD will become delinquent and the account will remain dormant with the bank, and the interest rate will be influenced in the same way.
What does RBI have to say about FD lagging?
The Reserve Bank of India (RBI) issued a directive on overdue deposits on July 2, 2021. Whenever a term deposit (TD) matures without proceeds, the amount unclaimed at the bank would earn the rate of interest applicable to savings accounts or the interest rate stipulated on the matured deposit account, whichever is lower, as per an RBI guideline.
RBI says “If a Term Deposit (TD) matures and the proceeds are not paid, the amount unclaimed from the bank will attract the interest rate applicable to the savings account or the interest rate contracted on the matured TD, whichever is lower.” The proposed regulations would apply to all deposit accounts held with scheduled commercial banks, small financial banks, local banks, primary (urban) cooperative banks/central district cooperative banks/state cooperative banks, according to the RBI announcement.
How will the interest rate be impacted?
It is well known that savings accounts pay lower interest rates than term deposits, and due to RBI guidelines, an overdue deposit will be charged interest at the same rate as the savings account form the bank. Consider the following scenario: A customer opens a fixed deposit account with State Bank of India (SBI) with a deposit of ₹5000 for a period of 5 years and up to 10 years. Based on the current interest rate of 5.5%, the total amount invested of ₹5000 will generate an amount at maturity of approximately ₹6,570 after 5 years.
Now, if the amount at maturity is not withdrawn or renewed, the applicable interest rate on the maturity proceeds held with the bank will be 2.70%, since the contractual rate is higher than the rate interest on SBI’s savings account, and RBI says that interest as applicable to savings accounts or the interest rate incurred on the matured DT, whichever is lower, will be applied to DFs in arrears, and in this case, the savings account rate is lower than the contracted interest rate.
How to counter the RBI directive on late FDs?
To avoid receiving lower interest rates on the amount at maturity of a fixed deposit, it is advisable to roll it over or withdraw the amount at maturity. Customers who have set up fixed deposit accounts with the offline bank may face difficulties as they have to go to the bank to transact with the account when due. It is advisable to create a digital term deposit account in the current scenario, and virtually all banks are now offering this alternative to their customers. When you create a digital term deposit account, you will receive a notification when your account reaches maturity and you can choose to automatically transfer the maturity proceeds to your savings bank account or automatically renew your FD depending on your own financial goals.
