Chennai: Fixed deposits have once again become an attractive option for investors with a large number of existing FD holders converting their old term deposits into new FDs at higher interest rates.
“Of the total approvals, 90% are new deposits while the rest are conversion of old deposits to new ones,” Govindan Bomba, general manager at Union Bank of India , said. With returns getting better as banks begin to hike rates, more customers are now breaking their existing FDs and are re-fixing them at higher rates. “When interest rates go up, some customers may find it beneficial to readjust their FDs to a higher interest rate,” S S Ranjan, chief financial officer at SBI , said. However , he said that such type of switching will be useful only for those customers who have opened FD accounts six months ago.
According to P Sitaram, CFO of IDBI Bank , the conversion of an old FD into a new one at a price. “For a fiveyear deposit, if a holder decides to break it after 3 years, he will have to settle down with interest rate for three years only. And in case interest rate on five-year deposit is more than three-year deposit, the interest rate differential will be deducted from the principal amount,” Sitaram said. “Thus, while changing an existing term into a new FD, one needs to bear in mind the interest rate one might have to forego in the process.”
When interest rates inch up, people tend to convert their deposits to higher rates, said S C Bansal, executive director at United Bank of India . However, it is senior citizens who are more sensitive to the changes in the deposit rates, as a quarter percentage change in the interest rates may make a lot of difference in their income, and they are the ones who shift their deposits from a lower rate to higher rates deposits
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