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Overdue FDs to earn lower interest after this RBI tweak; what you should do

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The Reserve Bank of India (RBI) has amended the rules regarding how banks will pay interest on overdue, unclaimed fixed deposits (FDs). As per the new rule, such overdue, unclaimed FDs will earn lesser of the interest between the prevailing interest rate on the FD and the saving account rate. “If a Term Deposit (TD) matures and proceeds are unpaid, the amount left unclaimed with the bank shall attract rate of interest as applicable to savings account or the contracted rate of interest on the matured TD, whichever is lower,” says the RBI notification.

RBI made this amendment to section 9 (b) of the Master Direction – Reserve

(Interest Rate on Deposits) Directions, 2016, that governs the way interest is paid by banks on these FDs.

Currently (i.e., before the amendment), if a term deposit (TD) has matured and proceeds were unpaid, the amount left unclaimed with the bank attracts a rate of interest as applicable to savings deposits.

As per the RBI notification, the amended rule will apply on FDs held with all kinds of banks such as Scheduled Commercial Banks, Small Finance Banks, Local Area Banks and all Primary (Urban) Co-operative Banks/ District Central Co-operative Banks/ State Co-operative Banks.

Depositors to lose interest further

Typically saving bank account rates are much lower than FD rates, so most depositors with overdue FDs have been earning a lower rate on their unclaimed deposits. Currently SBI give 2.70% interest on its saving bank account while it offers 5.4% one FD with tenure of 5-10 years.

However, we are currently in one of the lowest interest rate cycles seen in last two decades and going forward, the interest rates could start rising. It is likely that the interest rates on savings accounts could increase above 3.5% and depositors who booked their FD at lower rate would not get advantage of higher saving bank account rate on their overdue deposits.

What is an overdue FD?

An overdue FD is one where the investor upon maturity of the deposit does not claim the amount nor does he/she renew the FD; it remains idle with the bank.

This is not a situation faced by all depositors. Many depositors usually go for an FD with the same bank where they have their saving account and instruct the bank to transfer the maturity proceeds directly to the saving bank account upon maturity of the FD. In this case the FD will earn the saving bank interest rate after being transferred to the saving bank account.

Many other depositors go for the option of auto renewal of FD for the same tenure. In such cases, upon maturity a new FD of a certain tenure is booked at the prevailing interest rate.

The problem is with those depositors who do not have a savings bank account with the same bank and have not opted auto renewal option. They need to visit the bank and give instructions to receive the maturity proceeds. Such deposits often end up being overdue and unclaimed.

What should you do?

It is always better to have a savings bank account with the bank where you book your FDs as transacting is more convenient. You can always go for auto transfer of proceeds to your saving bank account. Else, you can also opt for the auto renewal option so that your FD gets renewed at prevailing the FD rate.

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