The Reserve Bank of India had allowed banks to launch a new variation of fixed deposits, known as non-callable FDs, in 2014-15. Subsequently, the central bank also urged banks to offer these FDs at better interest rates.
So, what are non-callable FDs and how are they different from conventional FDs? Is it is a good idea to consider investing in them? We take a look.
Traditional FDs allow you to withdraw the invested money before the end of the tenure if you face an emergency. Banks usually charge a penalty for such premature withdrawal.
Non-callable fixed deposits are like traditional FDs in other respects, but carry a fixed lock-in period and do not allow you to prematurely withdraw from your deposits.
A pre-mature withdrawal is possible only in the case of bankruptcy of the individual, under directions of a court of law or in the event of death of the investor. Currently, the five-year tax saving FD offered by banks is non-callable. Very few banks offer non-callable FDs with a different lock-in period.
The RBI has introduced this scheme to help banks improve their asset-liability management. As non-callable FDs cannot be broken before their tenure, banks can deploy the funds with a higher degree of certainty. This opens up opportunities for them to lend money for a matching period.
Pros and cons As an investor, the biggest reason for considering non-callable fixed deposits is the better rate of interest it can offer.
Currently, banks offer only a slightly higher interest rate for non-callable FDs. However, with the RBI’s proposal, there are chances that the product will carry better rates very soon.
Most banks have a minimum deposit requirement when it comes to non-callable FDs and this bar can be high.
This may render FDs not feasible for everyone. For example, Axis Bank offers non-callable fixed deposits under ‘Fixed Deposit Plus Scheme’ starting with a minimum investment of ₹15 lakh.
Canara Bank offers non-callable FDs for sums above ₹1 crore only, but the interest rate differential is not very high.
For callable deposits within the tenure of one to three years, the rate offered is 7 per cent per annum, while the rate for non-callable FDs of the same tenure is only 7.05 per cent. If you have a sum of money that is not required immediately, investing in non-callable bank FDs can be a good option, as the returns can be higher.
However, non-callable FDs make sense for bigger amounts, as the slight interest variations, offered now, can only make a substantial difference.
No auto renewals If you are someone who likes to auto-renew your FD accounts, non-callable deposits may not be the best option for you.
Non-callable FDs do not come with an auto renewal option.
Investing in fixed deposits is a popular investment option and, today, FDs come in different variations.
Before making your choice, make sure if non-callable FDs fit your investment objectives and preferences.
The writer is CEO, Bankbazaar.com
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