Nbfcs Fear Early Redemption Of Fixed Deposits

There is a possibility that the deposits will be withdrawn prematurely and put in as fresh deposits, which will fetch the depositor higher interest, said a member of an NBFC.

This is because the new rates, which finance companies are offering, are applicable only to fresh deposits and not to existing ones.

Members of finance companies said that in case the number of early redemptions climbs, most of them will be caught on the wrong foot.

A large number of companies, with the latest addition to the list being Kotak Mahindra Finance, have now got the Reserve Bank certificate to increase interest rates on deposits. As of now, two finance companies have already hiked the interest rates on fixed deposits.

 

Reliance Capital triggered the interest rate war, by offering 20 per cent on five-year deposits and 19 per cent on those for four years. The company is offering 15 per cent interest on one-year deposits.

As against market expectations of only a marginal hike in interest on deposits for one-two years, Premier Automobile Ltd's PAL Credit & Capital has hiked rates on the shorter end too.

The company is offering 17.50 per cent on one-year deposits as against the earlier 15 per cent. Two- and three-year deposits are now offering 18 per cent and 18.5 per cent respectively. Redemption is likely mostly in case of deposits for more than a year since the penalty levied on premature withdrawal is minimum in this case.

According to the Reserve Bank stipulations, the penalty for premature withdrawal after 12 months but before completion of the contract period is that the depositor gets 1 per cent less than the contracted deposit rate.

Most of the deposits with the finance companies are for one and two years. The factors which will determine the early redemptions will be the left-over period of the deposit and the interest rate difference between what the depositor is now getting and what he will get.