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Do non-callable fixed deposits offer any advantages?

In a non-callable fixed deposit, banks don’t allow customers to withdraw the FD prematurely. The depositor must wait until the maturity of the FD. Due to this, banks offer slightly higher interest rates on non-callable FDs.

Use them for diversification

FDs without a premature withdrawal facility are not available to all customers. According to regulations, the minimum amount for a non-callable FD should be above 15 lakh. Some banks ask for a minimum investment of 2 crore.

Most small finance banks require a minimum investment amount of more than 15 lakh and up to 2 crore. But lenders such as ICICI Bank and IndusInd Bank require a minimum deposit of 2 crore and 1 crore, respectively.

The interest rates on such FDs vary from bank to bank. According to Punjab National Bank’s website, a non-callable fixed deposit can fetch 5 basis points higher interest than a callable FD.

Between one year and up to three years, non-callable FDs offer an interest rate of 5.15%, while those with a premature withdrawal facility offer a rate of 5.1%.

In the case of small finance banks, the difference can be up to 25 basis points. One basis point is one-hundredth of a percentage point.

“Such deposits can be suitable for customers with a portfolio of FDs. They can decide the tenure based on their cash flow requirement and open a non-callable deposit. A part of their FD portfolio can get higher returns,” said Basavaraj Tonagatti, a Bengaluru-based Sebi-registered investment adviser.

Some investors are willing to take a risk for higher returns. They invest up to 5 lakh with banks offering better returns as such amounts have deposit insurance.

Others want safety and prefer to stick to a bank they trust, irrespective of the interest rates. For such depositors, non-callable FDs can help to give slightly better returns if they are willing to sacrifice liquidity.

Works well for banks

The Reserve Bank of India (RBI) had introduced non-callable FDs in 2015.

“Their origins are closely connected to the liquidity requirements laid out by an international framework for banks—Basel III. Banks are required to maintain a certain amount of liquidity for the deposits they receive. The Basel III framework developed post the financial crisis of 2007-08 called for an increased liquidity coverage ratio (LCR) requirement to mitigate risk,” said Adhil Shetty, chief executive officer, Bankbazaar.com.

“Under Basel III guidelines, banks must maintain a higher amount of liquidity for deposits that depositors can withdraw anytime, increasing the costs for banks. In 2015, the RBI allowed banks to take in high-value non-callable deposits to ease asset-liability management issues due to the LCR requirement,” added Shetty.

Things to watch out for

Banks allow withdrawal only if the depositor is legally bankrupt or dies or a competent authority passes an order.

If the interest rates on FDs start increasing, locking them without a liquidity facility at lower rates would put you at a disadvantage.

“One big attraction of fixed deposits is that depositors can withdraw them at any point. Without this feature, they might lose their appeal,” said Shetty.

This is probably the reason why they are not yet a popular product among depositors.

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