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Thursday, August 23, 2012

IDBI Bank rolls out floating rate term deposit

IDBI Bank has launched a floating interest rate retail term deposit (FRTD).

The rate of interest on the FRTD will move in tandem with a reference rate, which is the average yield at the 364-Days Treasury Bills auctions undertaken by the Reserve Bank of India (RBI) during the preceding three months.

“The interest rate in case of FRTD is anchored to a transparent, market-based rupee benchmark rate,” said the bank. The interest rate on FRTD would be reset every calendar quarter.

The minimum amount of deposit under FRTD will be Rs 10,000 and thereafter in multiples of Rs 1,000 with a cap of Rs 1 crore. The FRTD would have a lock-in period of one year and would be accepted in six maturity slabs, ranging from one year to ten years.

Switching option

Customers can switch from fixed to floating interest rate term deposits by closing the former at the originally contracted rate, without any premature penalty.

However, no conversion of floating to fixed rate is permissible, the bank said.

As in the case of fixed rate deposits, customers can also take a loan/overdraft against the FRTD.

IDBI Bank’s move to launch FRTD follows the RBI flagging the issue of banks offering their customers floating interest rate deposits at the first quarter review of monetary policy (on July 31) meeting with bankers. The RBI then underscored that such deposits are important and appropriate for the banks to manage their balance-sheets.

This will also help the central bank to get better monetary policy transmission.

According to an IDBI Bank statement, FRTD is intended to help the customer leverage the upside of an increase in interest rates and also hedge floating rate borrowings.

FRTD is likely to appeal to the retail investors who borrow at floating rates (say, for home loans) but invest at a fixed rate, and are consequently exposed to interest rate risk, said the bank.

“The floating interest rate deposits launched by State Bank of India in 2001 (benchmarked to fixed deposit rate) and 2010 (benchmarked to base rate) had met with limited success.

“However, our FRTD is linked to a market-related transparent benchmark. So, this could click with depositors,” said a bank official.


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