Tag: fixed deposit

Bank FD rates set to rise as inflation, recovery take hold, BFSI News, ET BFSI

Banking & Finance

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Banks and non-banking finance companies have started increasing deposit rates across tenures, especially rates on longer-term FDs on likely recovery in credit demand and rising inflation.

The number of lenders offering higher rates may go up over the next few months.

HDFC, Bajaj Capital

Mortgage lender HDFC has increased rates on fixed deposits maturing between 33 and 99 months by 10-25 basis points for the first time in 29 months. HDFC said from March 30, fixed deposits of 33-month duration will fetch 6.2% annualised returns while fixed deposits with 66-month maturity will now fetch 6.6% interest rate and the 99-month deposits will receive 6.65% interest rate. Further, senior citizens would get 0.25% more on the above-mentioned rates. Worth mentioning here is that this is the first time after October 2018 that HDFC Ltd has raised deposit rates. In February, Bajaj Finance, another top-rated lender had raised interest rates on fixed deposits by 40 basis points. Fixed deposits from Bajaj Finance with tenures of three to five years earn 7%.

Negative rate prospects

The finance ministry gave a scare of a rate cut on small savings schemes as such a move would have put pressure on reduction in bank deposit rates.

With inflation above 5%, deposit rates are already threatening to veer into negative territory, any rate cut would be a double whammy for depositors.

Retail depositors have struggled during the pandemic to maintain their earnings and also ensure inflation doesn’t erode their savings.

If inflation continues to rise, banks will have to offer higher deposit rates to investors, who in sight of negative returns, may shift their money elsewhere.

Rates kept down

In 2020, due to the pandemic, the Reserve Bank of India’s (RBI) adopted an accommodative stance with measures to keep the policy rates down throughout the year. It also announced measures to infuse liquidity in the banking system to be able to provide affordable financing and hence, support economic growth. Extra liquidity also kept interest rates down. The credit offtake was low as banks adopted a cautious stance towards lending across all sectors of the economy, which led to lower rates.

Growth this year

However, the banking system’s credit growth will almost double to 10 per cent in 2021-22 on the economic recovery and policy interventions.

The economic growth pegged at 10.5% by RBI for FY21-22 and 12% by foreign rating agencies. From a banks’ credit growth perspective, the agency said the expansion will accelerate by 4-5 percentage points to 9-10 per cent in 2021-22.

The faster credit growth will be led by retail loans, which are expected to grow in mid-teens, while corporate loans, which de-grew during 2020-21, are also likely to show a 5-6 per cent jump. This is expected to be driven by investment demand from infrastructure and real estate sectors as well as the release of pent-up consumer demand, thus resulting in high growth in retail finance.

The growth and demand for credit is likely to push up fixed deposit rates in the next 3-9 months.

RBI measures

Contrary to its accommodative stance, RBI has already reduced its liquidity support to the market with no additional liquidity measures announced in the latest monetary policy review in February 2021. It has withdrawn the 1% Cash Reserve Ratio relaxation for banks and now the CRR must be brought up to 4% in two tranches. A hike in CRR will lead to a reduction in liquidity available with banks which may force them to look out for more funds from retail depositors to meet their credit demand, thus adding another factor that can result in higher deposit rates.



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How good is Bajaj Finance’s Single Maturity Scheme?

Personal Finance

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Taking cues from the systematic investment plans (SIPs) of mutual funds, Bajaj Finance launched a new FD product earlier this year — the Systematic Deposit Plan (SDP).

We reviewed the product in January this year (tinyurl.com/SDPBaj). Bajaj Finance has now launched a variant of SDP, with a ‘Single Maturity’ option.

We take a look at whether this new feature makes the cut as a worthy investment.

Recap

The SDP essentially allows a person to make regular investments, a minimum of ₹5,000 every month. Each monthly investment is treated as a separate deposit, with tenures of each deposit being 12-60 months, at the choice of the investor. In addition, investors can opt for the number of monthly deposits, ranging from six to 48.

 

All deposits under SDP are cumulative deposits, implying that the interest will be paid on maturity only. The SDP essentially helps create a laddering effect due to different FDs under SDP maturing on different dates.

The change is that this product introduced in January is now called ‘Monthly Maturity Scheme’. Alongside,the company has launched a new variant, the ‘Single Maturity Scheme’. Here, customers will receive the maturity proceeds of all the FDs created systematically, as a lump sum, in a single day. Under the Single Maturity Scheme, one can deposit for tenures between 24 and 60 months. The number of deposits (beyond the first deposit) one can opt for varies from six additional deposits to 36, depending on the tenure.

Customers opting for a tenure of 24 months (minimum tenure under Single Maturity Scheme) will be required to make six additional deposits under the SDP (after the initial deposit). For SDP of higher tenure, say, 36 months, customers can opt to pay either six or 12 additional deposits. Similarly, for a 48-month tenure, one can opt to pay six, 12 or 24 additional deposits, and for a 60-month tenure, the options available are six, 12, 24 or 36 additional deposits.

The tenure of each deposit (instalment), after the first deposit, will gradually reduce such that all of them mature on a single date. Say, you opt for a single maturity scheme of 36-month tenure and opt for six additional deposits — your first deposit will have a maturity of 36 months. The second deposit will mature in 35 months, and third/fourth/fifth/sixth/seventh deposit will mature in 34/33/32/31/30 months, respectively.

Under this scheme, every deposit will fetch interest, according to the prevailing rate of interest on the date of deposit and for the respective tenure.

Worth it or not?

Post the recent revision in rates, Bajaj Finance offers interest rates of 6.9-7.1 per cent for (cumulative) deposits ranging 12-60 months.

Customers who apply online and senior citizens get an additional interest rate of 0.1 per cent and 0.25 per cent, respectively. The company’s deposits are rated AAA.

While the rates offered by Bajaj Finance are higher than most public sector banks, a few private banks —IndusInd Bank and RBL Bank, for instance — offer rates that are 10-15 basis points (bps) higher than those offered by Bajaj Finance currently. Small finance banks offer 10-25 bps higher rates, across tenures.

That said, investing in SDP, whether single maturity or multiple maturities, may make sense only in a rising-rate scenario.

If the company revises its interest rates at regular intervals, successive instalments will be locked into higher rates.

However, if you want to maximise the interest earned, deciding the number of systematic deposits and the tenure of the instalments beforehand can be a difficult task.

The new variant of SDP — single maturity scheme — can be somewhat similar to a recurring deposit (RD). But the difference is that in an RD the interest rate is constant throughout the tenure (flexi RDs may pay out higher interest on the stepped-up amount). Also, in an RD, you are required to contribute every successive month.

Under the single maturity scheme, you don’t contribute for all the months of the tenure. You can choose the number of months you want to contribute.

In a traditional RD, banks generally charge a penalty —in the form of lowered interest rate —in the event of a delay in or non-payment of an instalment.

No such penalty applies in the case of the SDP. Delaying a month’s SDP instalment only alters the tenure of that deposit (in the case of single maturity scheme) or pushes your maturity date for that instalment further (monthly maturity scheme).

You also have the flexibility to stop investing or restart after a gap with a new ECS (electronic clearing service) mandate.

If you have a steady cash inflow which you wish to keep reinvested, this product could be an option apart from RDs.

Otherwise, it is suitable for those who cannot keep a regular watch on interest rates in the market and the rates offered by different entities.

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How Equitas SFB beats most others in FD rates

Personal Finance

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Following the repo rate cuts by the RBI, banks have slashed deposit rates by up to 165 basis points (bps) since the start of the year.

Even small finance banks, which lure depositors with comparatively higher rates, have lowered interest rates on deposits by more than 100 bps (year-to-date).

With rates at a multi-year low now, locking deposits in long tenures will mean missing out on higher returns when the rate cycle begins to move up. A one-year timeframe is ideal as this will give the opportunity to reinvest at better rates later.

After the latest revision of rates, done in June 2020, Equitas Small Finance Bank’s (SFB) rates are better than that of its peers. For deposits of one-year tenure, Equitas SFB offers 7.1 per cent interest per annum. Senior citizens get an extra 0.60 percentage points. The minimum deposit is stipulated at ₹5,000. Investors can choose the cumulative option.

For a similar tenure, public sector banks offer interests of 4.9-5.55 per cent, while private banks offer up to 7 per cent.

For a similar tenure, deposits rates of other small finance banks (barring Fincare Small Finance Bank), after their recent revisions, are also lower than Equitas SFB’s rates.

FDs with banks (including those with SFBs) are covered under the deposit insurance offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for up to ₹5 lakh per bank.

Open FD online

Depositors who wish to stay home can apply online, using the Selfe deposit option (on the bank’s website). Customers can open fixed deposits (FDs) online for a tenure of up to one year only. Also, the maximum amount of FD that can be opened online is capped at ₹90,000. For opening a deposit with a higher tenure or amount, customers will have to personally contact the bank. In select regions, doorstep banking facility is available to open an FD.

The bank also permits partial or full premature withdrawals of the FD, but only after 180 days since the date of opening the deposit.

For deposits with effective tenure shorter than 180 days, a penalty of 1 per cent shall apply on premature withdrawal.

However, premature withdrawals are not permitted if the customer opts for monthly interest payouts.

About the company

Equitas Small Finance Bank, previously Equitas Finance, began operations in September 2016. The bank has about 854 outlets across the country, with vast presence in Tamil Nadu (328 banking outlets).

Tamil Nadu also accounts for about 61.9 per cent of its outstanding loan book as on June 30, 2020.

The bank is currently into micro finance, small business loans (including housing and agricultural loans) and vehicle finance. It also lends to MSEs and corporates.

As on June 30 the bank had a loan book of ₹15,573 crore, with gross NPA at 2.68 per cent. The bank’s capital adequacy ratios are well above the minimum regulatory requirement — Total CRAR and Tier-I CRAR at 21.59 per cent and 20.61 per cent, respectively.

In the wake of the pandemic, small finance banks have faced severe anomalies in their collections, predominantly those with higher exposure to micro finance.

That apart, the moratorium on loans also hints at the possibility of bad loans inching up in the coming quarters.

Equitas SFB also saw its collections efficiency drop to 49 per cent in June 2020, from 78 per cent in March 2020. Also, about 51 per cent of the bank’s customers (by value) had opted for the moratorium, as of June quarter end.

That said, according to its recent exchange filing, the bank’s collection efficiency improved to over 80 per cent in August 2020, thanks to the bank’s diversified loan book — micro finance only constitutes about 23 per cent of the loan book currently.

Also, the loan book under moratorium is only 35 per cent of gross advances at the end of August 2020.

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