The back-to-back policy rate hikes by the Reserve Bank of India (RBI) is bad news for borrowers but it is definitely good news for those who want to invest in fixed deposits (FDs).
Over the past few months, banks have been increasing interest rates on FDs, especially for those where the investment amount is below Rs 1 crore. State Bank of India (SBI), increased its FD rates by 5-10 basis points (bps) just a couple of days before the RBI monetary policy announcement on August 1. Soon after the policy announcement , HDFC Bank also increased its FD rates by up to 60 bps. It’s very likely for other banks to follow suit and start offering higher interest rates on FDs.
So, if you are looking at investing in bank fixed deposits, here is a look at what is on offer and what you should do.
PSU, private bank, foreign bank or new bank?
Banks across categories have been increasing their rates – be it public sector, private, foreign, or new banks. Compared to their private sector peers, PSU banks’ rates are slightly lower. However, the newly listed lenders and the small finance banks are offering even better rates (in some cases even 2 percent more).
SBI’s interest rate on 1-3 year regular FDs (non-senior citizen) is 6.7-6.75 percent per annum and PNB’s 1-3 year deposits earn 6.75 percent. Private sector lenders like HDFC Bank offer 7.25 percent on their 1-2 year FDs and for ICICI Bank it is 6.6-6.75 percent. Foreign banks like Standard Chartered’s 1-3 year FDs earn 6.5-7.25 percent and for DBS’ is 7-7.5 percent. Of the new ones, Jana Small Finance Bank is offering 8.25-8.5 percent on its 1-3 year FDs and RBL Bank’s deposits come with an interest rate of 7.5-7.75 percent. It is to be noted that banks typically offer 0.5 percent higher interest rate on term deposits to senior citizens.
What is on offer?
Points to consider while investing
Considering the current situation of Indian banks, one should not only look at interest rates offered, say financial planners. Here are a few things other than the rate of return you should look at while selecting a bank FD.
Safety: People invest in bank FDs because they are considered to be safe. FDs offered by public sector banks (PSBs) are viewed as safe despite many of the banks being heavily laden with non-performing assets, mainly because the PSBs are backed by the government. While banks are governed by strict regulations of the RBI but remember that technically, in the extreme eventuality that a bank does fail, your deposits are insured only up to Rs 1 lakh per bank by the Deposit Insurance and Credit Guarantee Corporation.
Therefore, planners like Suresh Sadagopan say that one should invest in FDs of a bank that has been around for a while instead of the new ones. “The risk is higher in the newer entities especially because they are lending to a completely new set of customers,” says Sadagopan. He adds that it may also be wise to choose a comparatively larger bank with an established track record. Additionally, remember that RBI’s rules governing scheduled commercial banks are stricter than those for co-operative banks. So the former category would normally be preferable to the latter.
Short to medium term tenures have higher rates: Currently, interest rates of deposits with tenures ranging from one to three years and in some cases up to five years are slightly higher than the rates on FDs of longer duration. For instance, PNB offers 6.75 percent for FDs with tenures between 1 year and 3 years and for 3-5 years FDs it is 6.25 percent. Bank of Baroda’s 1 year to 2-year and 3-5 year FDs earn 6.7 percent, whereas 5-10 year FDs earn 6.6 percent. For HDFC Bank, 1-2 year FDs come with an interest rate of 7.25 percent and 2-5 years with 7 percent. On the other hand, its 5-10 year FDs earn 6 percent. For Axis Bank, FDs with even shorter tenures earn more. Its 1 year to 14-month FDs come with an interest rate of 7.1 percent, and anything above that is 7 percent. Jana Small Finance’s 366-day FD has an interest rate of 8.5 percent, while for its 5-10 year FDs it is 7 percent. RBL Bank, too, offers a higher rate for its 12-24 month FDs – 7.75 percent. Its 120-240 month FDs will fetch you 7.2 percent.
Premature withdrawal penalty: RBI has asked banks to provide two types of FDs-one with premature withdrawal facility and one without it. So, check with the bank for its premature withdrawal rules.
For instance, SBI’s website states that for deposits up to Rs 5 lakh, the penalty for premature withdrawal will be 0.50 percent (all tenors), and above Rs 5 lakh but below Rs 1 crore, it is 1 percent(all tenors). “The interest shall be 0.50 percent or 1 percent below the rate applicable at the time of deposits for the period deposit remained with the bank or 0.50% or 1% below the contracted rate, whichever is lower.”
However, Jana Small Finance Bank does not levy premature withdrawal penalty on its FDs.
Taxes: Interest earned from FD is added to one’s income and taxed as per one’s income tax slab. For those looking to invest for the medium term , one may consider the 5-year tax saving bank FD that qualifies for tax benefit under section 80C, if tax saving is also required.
Your fixed deposit strategy
Bank FDs are meant for conservative investors who cannot stomach even the slightest volatility in their returns. Now, while selecting a deposit, you should know that each bank comes with its own pros and cons, so do read the fine print carefully. However, if you want to take full advantage of the high interest rate scenario, you should ‘ladder’ your investments across different tenures. Delhi-based financial planner, Surya Bhatia says that you should not put all your eggs in one basket, i.e., spread your risk out. You could look at investing in various tenures – put some money in a 6-month FD, some in a 3-year one, and invest a little bit in a 5-year FD, and put this money in different banks. You will be spreading the liquidity risk and you will also be locking into ‘higher’ interest rates for different tenures.
One thing you should keep an eye on is the auto renewal clause in case of any existing FDs that you have which are maturing soon. Most banks that allow investors to invest via the online route will have an auto renewal clause for their FDs. Even in case of FDs opened using physical forms, most banks set FDs on auto-renewal mode by default in case the customer does not specifically select another maturity option.
So, if you are not mindful of this, the deposit will get automatically renewed for the same tenure as before at the prevailing interest rate for that tenure. As the current interest rates for short and medium term have gone up therefore check at the time of maturity of your FD that the tenure it is getting auto-renewed for offers the highest prevailing interest rate. If not, you may wish to change the tenure to get the higher interest rate on offer.