IDBI starts floating-rate term-deposit scheme

IDBI Bank on Wednesday launched a term deposit scheme that offers floating rate of interest.

The interest rate — which is linked to the average yield on 364-day Treasury bills’ auctions conducted by the Reserve Bank of India (RBI) in the preceding quarter — would be revised every quarter. The minimum deposit in the product would be Rs 10,000 and the customer cannot withdraw the money for at least one year. Deposits would be accepted in six maturity slabs from one year to 10 years. The cap on accepting deposits under floating rates has been fixed at Rs 1 crore by the bank.

In August 2010, State Bank of India (SBI) had launched a floating rate deposit but the product generated tepid response. A senior SBI official said: “For banks, it is beneficial to launch a floating rate deposit product when interest rates are at a peak. But customers may not be interested in such a product in times like now. And when interests are at a low, customers may want such a product but banks will not be interested.”

During the pre-monetary policy deliberations with banks, RBI had urged banks to offer floating rate products on the liabilities side also. However, some of the bankers suggested that the country is not ready for such an offering, and asked the central bank to have more deliberations on the issue.

IDBI Bank has gone ahead and tried to implement the suggestion of the central bank. “We need to create more awareness and market the product properly to create more awareness among investors,” said R K Bansal, executive director, IDBI Bank.

There is a need for such products as most lending by banks are on floating rates while deposits are locked in at a fixed price, Bansal said.

People invest for the short term in bank fixed deposits, he said, to take advantage of high interest rates.

However, this product gives the customer the freedom to invest for the long term in bank fixed deposits. “If a customer invests for longer period, he’ll pass through three to four interest rate cycles. Therefore, he doesn’t need to break his fixed deposits again and again, and do premature encashment to get the advantage of high interest rates. But, yes, people need to be educated about it and we expect the product to pick up,” Bansal said.