Interest rate cycles.how to benefit from.?

We are now seeing in newspapers that the banks are gradually increasing the interest rates on loans and deposits. This increase follows the changes announced by the Reserve Bank Of India in the bench mark rates.Depending upon the inflation, money supply and international economic indications the central banks world over fine tune their policies to face any adverse effects created by these above mentioned factors. Our own RBI too does the exercise taking in to consideration the prevailing conditions domestically and also in the overseas markets. The interest rates which were soft for quite some years now have started to move upwards in response to the inflationary indicators. So the commercial banks one after another have been gradually increasing the interest payable by them on public deposits as also the rates on loans availed by customers from banks.

Fixed deposits : how to benefit from this interest cycle.?

Banks and companies offer fixed deposits. Fixed deposits are made for a specified time period and the interest rate remains same throughout the deposit period. Also fixed deposits offer a significantly higher rate of return than the normal savings bank accounts.Since the interest rate remains firm throughout the deposit period it is easier to estimate the returns and maturity value of these deposits.The interest is paid to the depositor on a monthly or quarterly basis. If interest is paid monthly then a small discounted rate is applied to calculate the interest. If the depositor wants to place his deposit in a cumulative interest scheme wherein the accrued interest with the principal amount is repaid at the end of deposit period. Here the maturity proceeds will be much higher as the interest gets compounded. Banks normally compound the interest once in a quarter. It will be prudent to place deposits under this scheme if one need the money in a short span of time. The longer the deposit period the more will be the benefits of compounding.With advancement in technology deposits can be opened online also but this may not be easy for every one .

Who can open a fixed deposit?

Deposits can be opened by individuals, companies, partnership firms, trusts,associations, a minor represented by guardian etc. Usual KYC norms as applied to savings account will be applicable here also. Those who already have a savings account in the branch need to fill up only the deposit opening forms. KYC document changes if any have to be updated with the bank. Deposits in the name of senior citizens carry 0.25/.50 percent extra interest. Loans to the extent of 75/80% of the accrued deposit value can be availed in case of need. These loans carry interest of 2% over and above the interest paid on the deposit.

Premature closure:

Fixed deposits can be prematurely closed in case of urgent need for money.Banks pay interest for pre closed deposits at 1% less than the rate applicable for the period for which the deposit remained with the bank. .For example we make an FD for Rs 2 lacs for 3 years with interest rate being 7%.Now after 2 years if we need the money back and close the deposit in full (no part closure).the bank will pay interest as applicable for two years after recovering penalty for pre closure if any. some banks have a scheme where in while opening the fixed deposit the amount is deposited in units of 5000/10000 etc so that when we need part amount of deposit we can break so many units as we need without breaking the full FD. supposing we make an FD for one lack in the computerised environment the amount is kept in multiples of 10000 and in case we need 40000 urgently we can close only 4 units of the deposit and the balance Rs 60000 will continue to earn interest at the contracted rates.

Loans against Fixed deposits:

As mentioned earlier we can avail loans against our deposits to the extent of 80/85% of the deposit accrued value at interest rates 1or 2 % above our deposit rate.Now a tricky situation may arise sometimes as follows. We place an FD for Rs 10 lacs for 3 years at say 7%..after one year we take a loan of Rs 2 lacs against this FD.Now the bank will charge interest at 8%or 9% on this loan .Let us say @9%..after another one year i.e at the end of two years we need more money and decide to foreclose the entire deposit of 10 lacs. The deposit has now completed two years with the bank.When we place our request for premature closure of the deposit the bank will pay interest on the FD at the rate applicable for two years which let us say is 6%.From this 6% payable a penalty of 1% may be deducted for premature closure and bank will pay interest at 5% for our deposit.Naturally we need to pay interest on our loan against deposit at the revised rate..I.e 5+2=7%..the excess interest paid on the loan at 9%minus recalculated at 7% has to be refunded to the depositor.

Tax deductions from FD interest payable:

Banks will deduct TDS at 10% on the interest paid to the depositor if the interest is more than Rs 10000.However the interest will attract tax as per the slab rate in which we are falling..If we are eligible for non deduction of TDS then we have to submit form 15G or 15H for seniors as the case may be . This form has to be submitted in the beginning of new financial year. If the bank has deducted any tax then we should obtain F16 to that effect from bank and claim refund if eligible when filing our tax returns.

Renewal of matured deposits…..

It is very important to remember the due date of maturity of our deposits and renew or encash them.delyed action will lead to loss of interest due to non renewal.

Points to remember:###

At the time of opening the fixed deposit we should collect the following details from the bank.

1. The rate of interest for different tenors.(period )

Whether the rates are fixed or floating based on RBI reference rates.

Whether interest is paid monthly and the discount if any.

In case of reinvestment schemes the periodicity at which interest is compounded.

Rate of interest for loan against our deposits and quantum of loan eligible.

Penalty for pre closure of deposits and reworking of interest on loans against deposits

In Case of pre closure of deposits..

whether overdraft against deposit can be availed or only fixed loan.

As a prudent depositor one should get all the above details for a trouble free investment.it is after all a one time collection of details which can be updated if there is any change from the bank ’s side

With more on deposits and investments next week,

Good bye for now. good luck.

Pichai iyer,

Chennai,

02/07/22