RBI made this change to Section 9 (b) of the Main Instruction – Reserve
(Interest on Deposits) Directions, 2016, which governs how interest is paid by banks on these FDs.
Currently (i.e. before the amendment), if a term deposit (TD) has matured and the proceeds have not been paid, the unclaimed amount at the bank will result in a rate of interest applicable to savings deposits.
As per the RBI notification, the amended rule will apply to FDs held with all kinds of banks such as regular commercial banks, small finance banks, local banks, and all primary (urban) cooperative banks / banks central district cooperatives / State cooperative banks.
Depositors will lose even more interest
Typically, savings bank account rates are much lower than DF rates, so most depositors with past due DFs got a lower rate on their unclaimed deposits. Currently, SBI grants 2.70% interest on its savings bank account while offering 5.4% of a FD with a term of 5 to 10 years.
However, we are currently in one of the lowest interest rate cycles seen over the past two decades and in the future, interest rates may start to rise. It is likely that interest rates on savings accounts could rise above 3.5% and depositors who reserved their FD at a lower rate would not benefit from a higher savings account rate. high on their overdue deposits.
What is a late FD?
A past due FD is one where the investor at the maturity of the deposit does not claim the amount or renew the FD; he remains inactive with the bank.
This is not a situation that all depositors face. Many depositors usually opt for a FD with the same bank where they have their savings account and ask the bank to transfer the maturity proceeds directly to the FD’s maturity savings bank account. In this case, the FD will collect the interest rate from the savings bank after it has been transferred to the savings bank account.
Many other depositors opt for the automatic renewal option of FD for the same term. In such cases, at maturity, a new FD of a certain duration is recognized at the prevailing interest rate.
The problem is with depositors who don’t have a savings account with the same bank and haven’t opted for the auto-renew option. They must go to the bank and give instructions to receive the product of the due date. These deposits often end up being past due and unclaimed.
What should you do
It is always better to have a savings account with the bank where you reserve your FDs because the transaction is more convenient. You can always opt for an automatic transfer of the product to your savings bank account. Alternatively, you can also opt for the auto-renew option to have your FD renewed at the current FD rate.