In 2015, the Reserve Bank of India (RBI) introduced a new concept of fixed deposits called ‘non-callable fixed deposits’. They were different from the earlier ones (callable/normal FDs) as they offered a higher interest rate and had a predetermined lock-in period. Soon after the announcement, Axis Bank— one of the leading private sector banks in the country—launched the first non-callable fixed deposit scheme for its customers. So, what are non-callable fixed deposits and how are they different from callable fixed deposits?
To understand this innovative concept of fixed-term deposits introduced by the RBI in the Indian banking system, we need to understand what a callable fixed deposit is, so that we can differentiate between the two.
What are callable fixed deposits?
As the name suggests, a callable fixed deposit allows the account holder to withdraw some or the entire deposited amount before its maturity date. In other words, all the fixed deposits which allow premature withdrawals are called callable deposits. However, the bank may charge some amount as a penalty for early withdrawals. There is no mandatory lock-in period in callable fixed deposits.
What are non-callable fixed deposits?
Contrary to callable FDs, non-callable fixed deposits have a predetermined lock-in period. The amount a person invests in this product can’t be withdrawn before the maturity date except in specific situations such as bankruptcy, court order, business liquidation, or the depositor's demise.
Since the funds remain locked in until the maturity date, non-callable fixed deposits offer a more attractive interest rate.
Non-Callable Fixed Deposits: Features
Minimum and Maximum Deposit:Earlier, the minimum deposit to initiate a non-callable fixed deposit was ₹15 lakh, but in October 2023, the RBI raised the minimum amount for offering non-callable Term Deposits (TDs) 6.66 times to ₹1 crore to ensure that retail depositors don’t get lured by additional interest rates.
The maximum deposit limit for non-callable fixed deposits is ₹5 crore. But for NREs, deposits should be below Rs. 2 crore.
Eligibility: The scheme extends its eligibility to residents and non-residents, accommodating a broad range of potential investors.
Maturity Period:The maturity period is between one and two years of the investment.
Auto-Renewal Facility:There is no provision for automatic renewal in this scheme.
Loan Against FD: The non-callable fixed deposits can be used as collateral for fund-based and non-fund-based loans, contingent on the established criteria.
Non-callable fixed deposits: Benefits
Higher interest rates:Non-callable fixed deposits offer more attractive interest rates on the principal deposit.
Stable Funding Source:Non-callable fixed deposits provide a stable, reliable source of funding for banks, allowing them to hold the funds until the maturity date.
Enhanced Asset Liability Management:Non-callable fixed deposits contribute to a well-established and effective asset-liability management system for banks.
Non-Callable Fixed Deposits: Limitations
While the non-callable deposits come with impressive advantages, it has some limitations also:
Limited Liquidity: Non-callable deposits lack liquidity. Under emergencies where we might be in dire need of the money, it is blocked.
High Minimum Deposit: The minimum amount of deposits is very high, thus limiting this opportunity only to a restricted class of people.
Funds are Locked In: Depositors' funds are locked in for a predetermined period, preventing them from capitalising on better investment opportunities during the lock-in period.
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First Published:
15 Mar 2024, 06:00 AM IST
Business NewsMoneyPersonal FinanceNon-callable vs normal FDs. How are they different? Features, benefits and limitations
