What is Term Deposits?
(a) Recurring Deposits or Cumulative Deposits :
In Recurring Deposits accounts, a certain amount of savings are required to be compulsorily deposited at specified intervals for a specific period. These are intended to inculcate regular and compulsory savings habit among the low/middle income group of people for meeting their specific future needs e.g. higher education or marriage of children, purchase of vehicles etc. The main features of these deposits are:
– The customer deposits a fixed sum in the account at pre-fixed frequency (generally monthly/quarterly) for a specific period (12 months to 120 months).
– The interest rate payable on recurring deposit is normally the applicable rate of fixed deposits for the same period.
– The total amount deposited is repaid along with interest on the date of maturity.
– The depositor can take advance against the deposits up to 75% of the balance in the account as on the date of advance or have the deposits pre-paid before the maturity, for meeting emergent expenses. In the case of pre-mature withdrawals, the rate of interest would be lower than the contracted rate and some penalty would also be charged.
Similarly, interest is charged on advance against the deposits, which is normally one or two per cent higher than the applicable rate of interest on deposits.
(b) Monthly-Plus Deposit Scheme / Recurring Deposit Premium account
It is a recurring deposit scheme with flexibility of “Step-up and Step-down” options of monthly instalments. The scheme is available to individuals, institutions, corporate, proprietorship or partnership firms, trusts, HUF, etc. Under the scheme, the customer selects the “core amount” at the time of opening the account and deposits the same initially. Minimum core amount may be `100 and maximum `1,00,000. Period of deposit will be pre-decided by the customer himself. The depositor can deposit instalment in excess of the minimum core amount (but not exceeding ten times of the core amount) in the multiples of `100 in any month. Like stepping up the instalment amount, a customer can also reduce the same (Step-down) in any subsequent months but no below the core amount. The interest on this scheme will be as per the term deposit rate applicable for the fixed period.
Interest will be calculated on the monthly product basis, for the minimum balance between the 10th and the last day of the month and will be credited quarterly.
(c) Fixed Deposits
Fixed deposits are repayable on the fixed maturity date along with the principal and agreed interest rate for the period and no operations are allowed to be performed by the customer against the deposit, as is permitted in demand deposits. The depositor foregoes liquidity on the deposit and the bank can freely deploy such funds for loans/advances and earn interest.
Hence, banks pay higher interest rates on fixed deposits as compared to savings bank deposits from which he can withdraw, requiring banks to keep some portion of deposits always at the disposal of the depositors. Another reason for banks paying higher interest on fixed deposits is that the administrative cost in the maintenance of these accounts is very small as compared to savings bank accounts where several transactions take place in
cash, transfer or clearing, thus increasing the administrative cost. Main Features of Fixed Deposits are as follows:
– Fixed deposits are accepted for specific periods at specified interest rates as mutually agreed between the depositor and the banker at the time of opening the account. Since the interest rate on the deposit is contractual, it cannot be altered even if the interest rate fluctuates – upward or downward – during the period of the deposit.
– The interest rates on fixed deposits, which were earlier regulated by the RBI, have been deregulated and banks offer varying interest rates for different maturities as decided by their boards. The maturitywise interest rates in a bank will, however, be uniform for all customers subject to two exceptions
-high value deposits above certain cut-off value and deposits of senior citizens (above the specified age normally 60 years); these may be offered higher interest rate as per specified Basis Points.
However, specific directions are issued by the bank’s board with regard to the differential rate and the authority vested to allow such differential rate of interest, to prevent discrimination and misuse at branch level.
– Minimum period of fixed deposit is 7 days, as per the directive of the RBI. The maximum term and band of term maturities are deter- mined by each bank along with the respective interest rates for each band.
– A deposit receipt is issued by the bank branch accepting the fixed deposit- mentioning the depositor’s name, principal amount, maturity period and interest rate, dates of the deposit and its maturity etc. The deposit receipt is not a negotiable instrument, nor is it transferable, like a cheque. However, a term deposit receipt evidences contract for the deposit on the specified terms.
– On maturity of a deposit, the principal and interest can be renewed for another term at an interest rate prevalent at that time and a fresh deposit receipt is issued to the customer, evidencing a fresh contract. Alternatively, the deposit can be paid up by obtaining the discharge of the depositor on the reverse of the receipt.
– Many banks prepay fixed deposits, at their discretion, to accommodate customers’ request for meeting emergent expenses. In such cases, interest is paid for the period actually elapsed and at a rate generally1 per cent lower than that applicable to the period elapsed. Banks also may grant overdraft/ loan against the security of their fixed deposits to meet emergent liquidity requirements of the customers. The interest on such facility will be 1 per cent – 2 per cent higher than the interest rate on the fixed deposit.
(d) Special Term Deposits
Special Term Deposit carries all features of Fixed Deposit. In addition to these, interest gets compounded every quarter resulting higher returns to the depositors. Now-a-days, 80% of the term deposits in banks is under this scheme.
Higher Interest payable to Senior Citizens:
Persons who have attained the age of 60 years are “Senior Citizens” in regard to the payment of higher interest not exceeding 1% over and above the normal rates of term deposits. Each bank has prepared its own scheme of term deposits for senior citizens.
(e) Certificate of Deposit:
Banks also offer deposits to attract funds from corporate companies and banks and other institutions. One such important deposit product offered by banks is called as Certificate of Deposit (CD) . Special features of a Certificate of Deposit (CD):
1. Certificate of Deposit is issued at a discount to mature for the face value at maturity
2. Minimum amount for a CD is ` 100,000.00 (` One lakh only) and multiples thereof
3. Minimum and maximum period a CD with banks are 7 days and 365 days respectively
4. CDs differs from Banks’ Fixed Deposits (FDs) in respect of (i) prepayment and (ii) loans.
While banks allows the fixed deposit holder the facility to withdraw before maturity (prepayment) and if required allows the fixed deposit holder to avail of a loan, both of them are not permissible in case of certificate of deposits. i.e., In case of Certificate of Deposits prepayment of CDs and loans against CDs are not allowed.