Sundaram Fin Offers Early Fd Renewal

Depositors can now prematurely foreclose their existing fixed deposits and open a new one immediately to benefit from the higher interest rates the company is now allowed to offer.

The new rates are: 15 per cent for one year, 16 per cent for 18 months, 16.5 per cent for 25 months, 17 per cent for 30 months and 17.5 per cent for 36 months, which will also carry a 2 per cent incentive. By offering higher rates for longer time deposits, the company will induce customers to deposit the money for longer periods.

The customer makes a net gain even after paying a small penalty for the foreclosure. The company also stands to benefit as funds will now become available for deployment for a longer period of time.

 

Although the cost of funds and overheads will increase, Sundaram Finance is willing to take on the extra charge as it will make substantial gains in terms of customer goodwill.

The scheme, however, is not without its drawbacks. Industry observers say the company will be faced with a large number of deposits that mature around a single month, making funds deployment a tricky affair.

Other NBFCs will, however, find the going tough. With Sundaram Finance showing the way, other NBFCs have little choice but to follow the leader. However, whether all of them will be able to handle the pressure on cash flows, much of which will be bunched together during a particular time of the year, is in serious doubt. Sundaram Finance's practice of paying the incentive direct to the investor and its infrastructure to meet the situation cannot be matched by most NBFCs. Thus, the other finance companies will have to match not just the interest rates offered to depositors, but also the brokerage.

Similarly, while overheads incurred on premature renewal can easily be handled by a company like Sundaram Finance, otherNBFCs will not be able to cope with additional costs incurred on postage and the fresh issue of interest warrants.