Bigger the FD, higher the return: Should you lock funds in non-callable FDs?

In fixed deposits, there are generally two categories: non-callable and callable. In non-callable FDs, a customer does not have an option to prematurely withdraw their money before the tenure is completed. On the other hand, in callable FDs, customers can withdraw their deposits at any time after paying the penalty, if any, which could differ from bank to bank. Banks offer callable and non-callable FDs with different interest rates for the same tenures. However, banks are known to offer higher rates on non-callable FDs. 

All fixed deposits which allow premature withdrawals are called callable deposits. Banks may charge some amount of money as a penalty for withdrawing the amount before maturity. However callable fixed deposits do not have any lock-in period. Before the launch of non-callable fixed deposits, all fixed deposit schemes in India were callable. 

 

Currently, interest rates offered to customers can increase with higher FD amounts. Data compiled by Bankbazaar shows that non-callable FDs are offering higher interest rates compared to callable FDs for the same tenure. This underscores the importance of considering the terms and conditions associated with FDs, as well as the impact of different features such as callability on the interest rates offered. By analysing this data, customers can make more informed decisions when choosing FDs that best align with their financial goals and preferences.

In the table avove, there is a 65 basis point difference between the interest rate offered by HDFC Bank on non-callable and callable FDs, Similarly Union Bank os offering an interest rate of 7.60  percent on a Rs 2 crore  non-callable FD for one year as sopposed to  6.75 percent on a callable FD. 

Even ICICI Bank offering an interest rate of 7.65 percent on a non-callable deposit for a 1 year 389 day tenure as opposed to 6.70 percent callable FD of the same amount. 

In a bid to earn a higher rate of interest, several depositors can avail the option of opening non-callable fixed deposits (FDs) which come with a strict lock-in period. But in emergencies where you might be in dire need of the money, it is blocked. The extreme cases of emergencies occur rarely that do allow withdrawal, else the deposited money cannot be touched. Hence, this instrument can be barely liquidated. If the depositor who bought these non-callable fixed deposits has a maturity period of five years and in the second year he or she found a better investment opportunity where he or she can certainly make better returns than the interest given by the bank through the non-callable fixed deposit.

"Non-callable FDs cannot be prematurely liquidated unless there are mitigating circumstances such as bankruptcy or death. The reward for the delayed gratification is the higher interest payout. There are plenty of instances where the differences in interest rates between a callable and non-callable FD for the same tenor is upwards of 50 bps. Currently, the offers on display by large banks are typically for bulk deposits of Rs1-2 crore. From time to time, banks may accept non-callable deposits on smaller deposits – for example, Rs 15 lakh and above. Remember that these deposits are good when you get deferred gratification. Do not lock in your emergency savings in this deposit. It should only be money you can defer using for the whole tenor," said Adhil Shitty, CEO of BankBazaar.

The minimum deposit amount for such an investment is very high. For instance, to open a non-callable FD account in India, you need a minimum of Rs 1 crore.

In a notification released on October 26, 2023, the Reserve Bank of India said, "On a review, it has been decided that (i) the minimum amount for offering non-callable TDs may be increased from Rupees fifteen lakh to Rupees one crore i.e., all domestic term deposits accepted from individuals for amount of Rupees one crore and below shall have premature-withdrawal-facility and (ii) these instructions shall also be applicable for Non-Resident (External) Rupee (NRE) Deposit / Ordinary Non-Resident (NRO) Deposits."

This circular is applicable to all commercial banks and co-operative banks, said the central bank.

Who should opt for it? 

Suppose you plan to open a new branch for your business after three years. You have saved enough capital right now and want to invest it. You have a fixed investment goal and do not want to risk losing money by investing in high risk schemes. So, you opt for a fixed deposit (FD) scheme for better risk-adjusted returns." Once you have decided that you do not want to utilise the investment for other purposes and choose to invest in FD, you should opt for non-callable deposits.

These FDs do not allow you to withdraw your deposit before the maturity date, which is not the case for callable FDs unless a court order is issued in the event of death or bankruptcy. Moreover, non-callable FDs also have a higher rate of interest than callable FDs! They are a great tool to achieve a fixed financial goal and a good option to diversify your investment portfolio," said Wint Wealth in a note.