Ingenious investors in non-banking finance companies (NBFCs) may now have to weigh the implications before they move out of their fixed deposits (FDs) prematurely.
The revised Reserve Bank of India (RBI) rules on premature withdrawals of fixed deposits held with finance companies are acting as a damper on such proclivities. These investors seek to withdraw their fixed deposits prematurely, and yet earn an interest higher than the contracted rate.
Finance company officials pointed out that when the non-banking finance companies deposit rates were deregulated, a number of investors said they intended to place funds in five-year deposits. However, they were set to withdraw their monies after one year.
According to the earlier RBI guidelines (applicable when the interest rates had a cap of 15 per cent) on premature withdrawals, the investor would get 1 per cent lesser than the contracted rate. These norms also stipulated that in the case of premature withdrawals beyond one year, the investor would get 15 per cent, less 1 per cent, which would be 14 per cent. On the other hand, in a deregulated deposit rate milieu, finance companies are offering rates as high as 20 per cent on a five-year deposit. If the earlier RBI guidelines continued to be in force, the investor would root for 19 per cent on premature withdrawal of a five-year deposit.
This would mean that a finance firm would be tied down to a rate which would be higher than what the company paid on a regular one-year deposit. The reason: the contracted rate being 20 per cent now, is greater than the earlier cap of 15 per cent. A number of officials in our own company were thinking of withdrawing prematurely and making use of the contracted rate clause, said a senior official with a finance company.
However, the refashioned RBI guidelines have specified that for premature withdrawals, the rate of interest payable shall be the one applicable to the period for which the deposit remained with the company, less one percentage point penalty for premature withdrawal.
RBI, for instance, clarifies that if a depositor has opted for a two-year deposit, but withdraws it at the end of one year and one day, the rate applicable will be 1 per cent lesser than the going interest rate on a two-year deposit.
This would entail a certain amount of loss for the finance company as it will be paying a premature withdrawal rate for a two-year period.
The investor, actually, kept the money for a one year only. However, the loss will be marginal compared with what the company would have incurred, had the earlier rules on premature withdrawals still been in place.
