To cope with the tight liquidity condition experienced by the banking sector, lenders such as Bank of India are offering fixed deposit (FD) schemes for a limited period. These schemes are offering high rates of interest, but the period for which they are available is not mentioned by any bank.
For Bank of India, which is running a limited period offer on FDs having a maturity period of 555 days (around one-and-a-half years), the interest rate is as high as 9.25%. The country’s largest lender, State Bank of India, also offers 9.25% on its regular FD scheme for the same maturity period. However, some private banks, such as Karur Vysya Bank Ltd, offer higher interest rate of 10.25% on their regular FD scheme for the same maturity period.
Why limited offers
Banks often face credit-deposit mismatch. One of the reasons for such a mismatch is less-than-expected deposits. To bridge this shortfall, banks offer specific tenor FDs witnessing lower levels of deposit through such limited period offers. “Maturities which offer highest rate generally attract high customer interest. Once banks are able to mobilize deposits according to their requirement, they reduce interest on such maturities,” says a senior official of Bank of India who did not want to be named.
Agrees C.M. Khurana, general manager, large corporate credit, Oriental Bank of Commerce: “While asset-liability committee of the bank can alter interest rates on any maturity, the maturities under limited period offer are generally the first ones to see change in deposit rates.”
But there are no specific records available if such schemes are drawing attention of investors, adds Khurana.
Should customers go for such offers?
With the food price inflation in double digits, many analysts expect the Reserve Bank of India to harden policy rates further. Consequently, deposit rates may also go up. Does this mean that customers who opt for such limited period offers will lose out once deposit rates on other schemes go up?
“No,” says Kartik Jhaveri, founder and director, Transcend Consulting, a Mumbai-based private financial planning and wealth management firm.
“Though the general expectation is that interest rates will harden in the future, there is no guarantee. Also, no one knows when that would happen. Hence, for a conservative investor these schemes are the perfect ones to invest in,” says Jhaveri.
In case interest rate were to go up, investors can withdraw from the limited period FD scheme and put the money in higher paying FD offers. A premature withdrawal penalty of, in general, 1% is levied on limited period FD schemes.