Breaking an old FD for a new one gets tougher
By Neelima Shankar
Apr 21, 2010
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Interest rates are on the verge of a rise following the policy rate hike announced by the RBI in its monetary policy announcement yesterday. At this time if one wishes to break the FD paying lower interest rate and switch to one offering higher rates, the deal would be a costly affair.

The RBI has allowed banks to design their own policy for dealing with customers who wish to switch their deposit schemes.

The current policy that has been prevelant in this issue has been such that banks would convert FDs without enforcing any kind of penalty or reduction in interest rates for the customer as long as the money is brought into a new FD.

But the apex bank has freed commercial banks from this boundation in its credit policy announcement. "Banks can formulate their own policies towards conversion of deposits," the RBI said.

"We have to formulate a uniform policy as we cannot discriminate between customers. But certainly any mass movement of customers from one scheme to a more attractive one can be checked," said a senior SBI official.

"It (the new norm) allows banks to impose a penalty but this is unlikely to happen in the near term as there will not be a volatile interest rate regime and customers are also used a particular manner of treatment by banks. But it certainly will help manage their asset liability mismatches," KVS Manian, group head of consumer banking at Kotak Mahindra Bank.

"It is fair to banks, customers and loan takers. Earlier people would take a one-year FD and then break it. We could not be sure of the tenure and had to increase rates on home loans and other loans to balance things out. Now the customer cancels and he is penalised. This is evenly balanced and sustainable for banks," a senior private bank official said.


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