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Bank FDs is a good option for people with low-risk profile,
Bank FDs is a good option for people with low-risk profile,

These banks are offering up to 7% on bank FDs. Are they worth the risk?

  • It is often suggested that investors should look at the overall health of a financial institution before parking their money. However, it will be difficult for a lay investor to check the credentials of a bank

Interest rates on fixed-income instruments have fallen drastically over the last one and a half years in India, with rates on bank FDs declining to their lowest level in years. However, there are some lenders that are offering much higher interest rates on fixed deposits compared with their peers.

As per data compiled by Bankbazaar.com, a few banks such as Yes Bank and IndusInd Bank were offering rates as high as 7% on FDs as of 24 November. While, Yes Bank’s FD rates were 7% for tenure of two-three years, IndusInd Bank was offering 7% for tenures of one-two years and two-three years. The rates are for deposits of up to 1 crore.

Source: Bankbazaar.com
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Source: Bankbazaar.com

Notably, for one-two year tenure, the Tamil Nadu-based Lakshmi Vilas Bank (LVB) was giving 6-7% on its bank FDs.

Compared with this, some of the biggest banks such as State Bank of India, HDFC Bank and ICICI Bank are offering rates in the range of 4.9-5% for the tenure of one-two years for deposits of up to 1 crore.

The recent crisis at LVB has once again highlighted the risks associated with high-paying bank FDs. Earlier this month, the Reserve Bank of India (RBI) had imposed a one-month moratorium on the lender and capped deposit withdrawals at 25,000, while announcing an amalgamation scheme with DBS Bank India Ltd (DBIL). On Friday, the merger of the two banks came into force and the moratorium was lifted, meaning customers can withdraw more than 25,000 from their accounts. However, the incident revived the memories of issues that the costumers had to face in the cases of Yes Bank and PMC Bank.

When it comes to bank FDs and savings accounts, only up to the amount of 5 lakh is secured at Indian banks. So are high-interest paying bank FDs worth the risk?

According to experts, if the lender is in good shape, the returns will not be high, or they will be in line with what other banks are offering.

“Ideally one should avoid higher paying fixed-income instruments, especially in an environment of higher credit risk," said Suresh Sadagopan, founder, Ladder 7 Financial Advisories, a Sebi-registered investment adviser, while adding that “anybody who is depending on bank FDs to generate some level of income in the current scheme of things will be better off with lower interest rates rather than losing the money altogether."

It is often suggested that investors should look at the overall health of a financial institution before parking their money. However, it will be difficult for a lay investor to check the credentials of a bank. As an alternative, Sadagopan suggests sticking with a few top banks, as far as FDs are concerned.

Investors should also mind the tax factor, as FDs are not very tax efficient. For example, if you are getting a 5% return and are in the 20% income tax slab, you may end up getting a 4% return from your FD, which is not very significant considering the high inflation.

According to Sadagopan despite some shortfalls, the lure of bank FDs will stay, as they have better liquidity and come with multiple tenure options. “Especially in the case of retired people, who don’t come under higher tax slabs, and they want a simple portfolio, then a predominantly FD kind of portfolio is recommended," he said. However, the allocation towards bank FDs should be much lower in younger age groups.

Bank FDs is a good option for people with low-risk profile, but the key is to stay with the bigger banks.

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