Bank Deposits Get Differential Treatment

<div><em>It’s always better to lock in funds at current rates to benefit out of the falling interest rates, says <strong>Sunil Dhawan</strong></em></div><div>&nbsp;</div><div>&nbsp;</div><div>At a time when RBI is cutting policy rates thus pushing banks to reduce their base rate which subsequently brings down the fixed deposit rates, there comes the news about bank offering a high interest rate on select deposits. Axis Bank, India’s third largest private sector bank has launched “Fixed Deposit Plus”, a Fixed Deposit scheme which offers a higher rate of return on their fixed deposit compared to regular fixed deposit rates.</div><div>&nbsp;</div><div>Few months back, RBI had allowed banks to offer differential treatment to their deposits based on whether they can be withdrawn. If deposits are not allowed to be withdrawn by deposit holders, banks may offer higher rate compared to those deposits which can be prematurely withdrawn.&nbsp;</div><div>&nbsp;</div><div><strong>Features: </strong>The minimum amount of deposit has been kept at Rs 15 lakh and the duration of the deposit has been kept in between 1 year to less than 2 years. There is, however, no premature withdrawal faculty and amount gets locked –up till maturity. The interest rate on such deposit is 0.1 per cent higher than regular deposits. AXIS Bank currently offers 8.2 per cent on deposits of 1 year to less than 2 years, hence on Fixed Deposit Plus, the rate would be 8.3 per cent. &nbsp;One may open a short term deposit of say 6 months. Interest can be had on monthly or quarterly basis.&nbsp;</div><div>&nbsp;</div><div>Presently in banking industry, differential interest rate is offered for deposits based on the amount of deposit. Different banks have their own limits. Few may offer a specific rate for amount up to Rs 1 crore, while others may put it at Rs 3 crore or Rs 5 crore. However, all such deposits can be withdrawn prematurely. On premature withdrawals, there could be a penalty imposed by bank. In case of premature withdrawal, banks typically charge penalty by considering interest rate of 1 percent below the rate prevailing as on the date of deposit.&nbsp;</div><div>&nbsp;</div><div><strong>What to do:</strong> The interest rates are on the way down. It’s always better to lock in funds at current rates to benefit out of the falling interest rates. Axis bank offer may well see other banks launching similar product with maybe better deal. Such differential interest rate deposits helps in case an investor has surplus funds to be deployed for a short duration of say 3-6-7 months. While most banks would be offering similar rates on shorter duration, getting a marginal higher rate helps. &nbsp;However, make sure you don’t need those funds before that date as premature withdrawal is strictly not allowed.&nbsp;</div><div>&nbsp;</div>