Unbreakable Bank Fixed Deposit as the name suggests cannot be withdrawn prematurely. In other words, people cannot break their bank fixed deposit before the end of maturity period. Reserve Bank of India has allowed the banks to offer Unbreakable Bank Fixed Deposit at higher interest rate. It will provide an option to earn higher interest to people who don’t need funds for certain period. Unbreakable Bank Fixed Deposit is not a new concept. It is being borrowed from more mature markets. In India, Fixed Deposit means fixed interest rate but actually it is term deposit i.e. deposit for fixed term (Cannot be withdrawn). Bank Fixed Deposit is stereotyped as safe and liquid i.e. it can be withdrawn prematurely backed by Govt. Banks charge penalty of upto 1% if the FD is broken before the end of maturity period. USP of Unbreakable Bank Fixed Deposit will be HIGH INTEREST RATE. As i mentioned, this product is popular in matured markets and banks should not market it as “fixed deposit offering higher interest rate”. Rather depositor should be educated and informed about the product features along with its advantages / disadvantages before booking unbreakable Bank Fixed Deposit.
Advantages of Unbreakable Bank Fixed Deposit
1. Higher Interest Rate: As i mentioned that higher interest rate will be USP of Unbreakable Bank Fixed Deposit. From customer perspective, interest rate should not be the only criterion before taking any decision in this regard. Please understand that higher interest rate will be offered at the cost of liquidity. Before opting for Unbreakable Bank Fixed Deposit, it is necessary to do a complete financial planning considering the short term and long term requirements. Also take care of any preventive health care needs and contingency funds. In short, just consider that amount deposited in Unbreakable Bank Fixed Deposit will not be available for specific time period.
2. Banks can raise long term funds: Today the biggest pressure on banks is liquidity pressure specially for small banks. Banks work on one simple assumption that all depositors will not come one fine day and ask for their money. If this happens then entire banking system will collapse. All banks have their own learning curve in terms of average cost and tenure of funds under fixed deposits, savings account etc. There is always an element of uncertainty on liquidity front therefore you might have observed that if you need big amount from your account then you need to inform bank a day or two in advance. This amount limit is different for different banks and branches. In one of the small branch, i need to inform a day in advance for withdrawal of just Rs 1 lakh. Reason being, banks don’t keep entire money with them, they lend to earn interest income so that they generate income for themselves and also pay interest to the depositor. Unbreakable Bank Fixed Deposit will eliminate this uncertainty and banks can raise funds for long term requirements without getting worried on liquidity fund. Since it will be high value deposit therefore complaints will be less in this regard e.g. mis-selling or forced selling.
3. Maturity Period of Unbreakable Bank Fixed Deposit: It is not necessary that unbreakable Bank Fixed Deposit will be only for long period. Bank may launch this product for short term depending on RBI guidelines. You must have observed that banks offer differential interest rate for different maturity period. Depending on fund requirements, bank may offer higher interest for short term unbreakable Bank Fixed Deposit and vice versa. Therefore this product is going to help all types of customers i.e. who would like to lock their deposit for short or long period.
4. Forced Savings for Long Term Goals: From personal finance perspective, you can use this product for long term goals. Being “unbreakable” is advantageous for such goals. For example, if my kid is of 5 years age and i would like to save for long term goal i.e. my kids education which is 15 years from now. It will be good if i invest in non-liquid product so that i should not disturb this long term financial goal through premature withdrawal.
Disadvantages of Unbreakable Bank Fixed Deposit
1. Liquidity: As such we cannot say its a disadvantage because product is designed in such a way, any deposit under unbreakable Bank Fixed Deposit is non-liquid. It will break the stereotype attached with bank fixed deposits that we can withdraw during the need of hour. Only the amount which is 100% not required for specific period should be parked in unbreakable Bank Fixed Deposit. Again for Indian depositor, lock in period always remain key concern. Secondly, the demand of unbreakable Bank Fixed Deposit will be more from rich class compared to middle class.
2. Interest Rate Fluctuations: Currently, most of the depositors break their existing FD and re-book fixed deposit in case of increasing interest rate scenario. In unbreakable Bank Fixed Deposit it is not feasible. In short, Unbreakable Bank Fixed Deposit is more suitable in case of decreasing interest rate scenario. During reversal of interest rate cycle i.e. in case of increasing interest rate depositor will stuck and will be at loss. It is advisable to opt for this product only in case of reducing interest rate cycle to lock the money at higher interest rate.
3. Tax on Interest Income: Depositors in higher income tax bracket should check the incremental interest offered. It is advisable to calculate net returns post tax. If the interest offered is 2% higher compared to existing interest rate then it may make more sense to book unbreakable Bank Fixed Deposit. In short, incremental interest should be able to take care of most of the tax part. For people in lower income tax bracket it will be beneficial.
When new financial product is launched, no one is aware how it will evolve and shape up in terms of adaptability. Product team of Bank will also take time to the study behavior of depositors to fine tune product as per Indian requirement. Primarily this product looks more suitable for
(a) Achieving Long Term Goals
(b) During reducing interest rates
(c) Financially stable depositors
(d) HNI’s (High Networth Individuals)
There is a possibility that higher interest can only be max 0.5% as it will be decided by RBI. In Indian scenario, It is not advisable to compromise on liquidity of financial product for upto 1% incremental interest rate. It makes more sense if interest rate offered is atleast 1.5%-2% more than existing rates. Reason being there are no tax sops attached and income will be taxable in the hands of depositor.
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