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Floating term deposit rates to woo investors

india Updated: Feb 11, 2011 00:48 IST
Sachin Kumar
Sachin Kumar
Hindustan Times
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Now, the depositors will be able to grab some benefit from the rising interest rate scenario, as commercial banks have begun to introduce floating term deposit schemes.

After State Bank of India (SBI), which launched this scheme in September last year, Corporation Bank will shortly introduce floating term deposit scheme in which the interest rate will be flexible during the tenor and not fixed.

"The scheme has been approved by the board of directors and will be launched in February," said a senior official, Corporation Bank who did not wish to be quoted. http://www.hindustantimes.com/Images/HTEditImages/Images/11_02_11_buss25b.jpg

"The tenor of the floating term deposits will be around one year and will be targeted to attract retail investors," he said.

Unlike the current fixed deposit schemes in which interest rate remains fixed during the tenor, the interest rate in the proposed scheme will move in tandem with a reference rate.

When the reference rate will move up the interest rate will also go up and will come down if the reference rate dips.

With this, there will be no need for the depositors to contemplate premature closure of their existing fixed deposits and face penalty.

Currently, if any depositor goes for premature closing of his fixed deposit, the depositor has to pay a penalty for the premature withdrawal.

The introduction of this scheme at this time assumes importance as deposit rates are expected to go up in 2011.

Due to shortage of liquidity and low growth in deposit mobilisaton, banks have increased deposit rates twice in the last three months.

The Reserve Bank of India had in its monetary policy released last month asked banks to improve deposit growth.

At present, fixed deposits of banks with one-year maturity yield interest in the range of 8% to 10% per annum.

SBI has linked interest rate of its floating term deposit scheme to its base rate, which is 8% at present.

For the one-year product, the rate is 50 basis points (bps; 100 bps = 1%) lower than the base rate. For three years, the deposit rate is 25 bps lower and, for a five-year tenure, the deposit rate is equal to the base rate.