Understanding Callable and Non-callable Bank Fixed Deposits (FDs)


In this article, know about a new fixed deposit scheme introduced by the RBI, known as the Non-callable Bank Fixed Deposits (FDs). What is a Non-callable fixed deposit, its features and other aspects of it have been discussed.

Introduction


In the recent RBI 6th Bi-Monthly Monetary Policy Statement, a new type of Fixed Deposit (FD) has been proposed known as Non-Callable Bank Fixed Deposits (FDs) . In response to this, Axis bank launched the first non-callable fixed deposit. To understand this new concept, let us first see what is a callable fixed deposit, what is a non- callable fixed deposit and the difference between the two.

Features of current fixed deposits (FDs)

  • One can earn interest at a certain rate on the amount deposited. The amount one can deposit is categorized as below 1 crore and above 1 crore.
  • The rate of interest on the amount deposited varies according to the duration of the deposit. Longer deposit tenure usually gives a higher rate of interest.
  • Senior citizens get a slightly higher interest rate.
  • Premature closure of FDs i.e., before the completion of the FD's tenure, attracts some penalty by the bank.

What are callable Fixed Deposits (FDs)?


The FDs currently offered by banks are known as callable fixed deposits. Here you can withdraw the FD amount anytime before maturity and banks charge some penalty for this. But there is no lock-in period for such FDs and you can get your amount deposited immediately (in most cases). The term 'calling an FD' means withdrawing the FD, or in other words, callable FD means the depositor is calling his FD for withdrawal.

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What are non-callable Fixed Deposits (FDs)?


Non-callable fixed deposits are similar to callable FDs but the major difference is that non-callable FDs cannot be withdrawn or closed before maturity. These are hence completely locked and the depositor has no authority to close it prematurely.

Why Non-callable Fixed Deposits (FDs) have been introduced?


Consider a depositor, Mr. A deposits some money in bank for 2 years and the bank has to pay interest on it, say X%. Now the bank cannot pay the interest by just keeping Mr.A's money idle. The bank must invest or lend this amount somewhere else so that it gets a return greater than or equal to the interest payable to Mr.A.

Suppose the bank has invested Mr.A's amount with another Mr.B for same 2 years at Y% (Y% > X%). With this the bank not only makes a profit, but also becomes tension free regarding the interest payable to Mr.A.

Now Mr.A returns after a year and wants his money back. If the bank does not have enough funds, then it must go to Mr.Y to take back its investment. In this situation, Mr.Y may or may not return the money back to the bank. This creates asset-liability management issues for the bank. In order to avoid such circumstances, the RBI has proposed this concept of non-callable FDs.

Features of Non-callable Fixed Deposits (FDs)


As stated above, Axis bank has launched the first non-callable FD scheme, known as 'Fixed Deposit Plus' . Let us look at the features of Axis Bank's Fixed Deposit Plus FD scheme.
  • Minimum Deposit: Rs.15, 00,001
  • Minimum Deposit Tenure: 1 year
  • Minimum Deposit Tenure: 2 years
  • Withdrawal before maturity is not allowed, except in cases of Bankruptcy, orders by, winding up of business, death cases, etc.
  • In such scenarios, the FDs will be treated as callable deposits and normal FD rules will be applicable.
  • Non-callable FDs cannot be auto-renewed.
  • For the interest, the depositors have the option to select either simple or compound interest.
  • Apart from Indian citizens, NRIs can also deposit in this scheme.

How effective are non-callable bank fixed deposits (FDs)?


For a 1-year callable FD, Axis bank if offering an interest of 8.20%, while for a non-callable deposit of the same tenure, the interest rate is 8.30%. That is a difference of just 0.10%, which is not a too great difference for small investors. As the minimum deposit is also a large amount, it is more titled towards big investors or those who have surplus amount to park, which may not be required in the near future (say for 1 or 2 years).

Also See: Fixed Maturity Plans (FMP) vs Fixed Deposits (FD): Make a smarter choice!

If you do not fall in any of these categories of investors, then locking your money for a meager difference of only 0.10% can cause trouble while liquidating it. Also as the lock-in period is minimum one year, it is not suitable if you are looking for a short term investment (for a few months). Therefore, one must think well and take the right decision before investing in non-callable fixed deposits.


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