Banks to impose penalty on premature closure of FDs

Written by: Pti
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New Delhi, Jan 30 (PTI) Next time you wish to cash inyour fixed deposits, be ready to pay a penalty of as much asone per cent of the investment if money is withdrawn beforecompletion of the maturity period.

In a bid to discourage premature withdrawal of money fromfixed deposit accounts, banks have decided to impose a penaltyon such transactions to minimise any impact on their liquidityposition at a time when rising interest rates are pushing upthe cost of funds for them.

RBI has left it to banks to decide whether they want toimpose any penalty on premature closure of fixed deposits.

As such, the customers are given a return lower than thepromised interest rate in case of early withdrawals.

Although some of the public sector banks have already inplace a mechanism to impose a penalty on pre-mature withdrawalof money from FDs, a number of others, mostly private sectorbanks, have not been charging any such penalty in theirattempts to lure more customers.

However, the continuous rise in interest rates overrecent months have pushed the cost of funds much higher forthe banks and premature withdrawal from deposit accounts hasput unnecessary pressure on the banks'' liquidity position, asenior private sector banker said.

Earlier, the banks used to give only the interest rateapplicable to the period for which the deposits have beenmaintained in case of premature withdrawals and not the fullreturn promised at the time of booking the FDs.

In such a scenario, some of the banks, including thecountry''s second largest private sector bank HDFC Bank, havedecided to impose a penalty of one per cent for all prematurewithdrawals from fixed deposits.

With effect from January 24, HDFC Bank has decided toimpose one per cent penalty on premature closures, includingfor partial withdrawals, it said in a customer circular.

On the other hand, some others such as IDBI Bank willspare new deposits from the penalty clause to lure morecustomers, but would impose a fine in case of older deposits.

On its part, IDBI Bank has said it would not charge anypenalty for premature withdrawal on its various term depositsopened/renewed with effect from January 1.

However, in case the customer wants to prematurelywithdraw the FDs booked before January 1, 2011, a penalty ofone per cent would be imposed, IDBI Bank said.

"Interest payable on prematurely withdrawn deposits willbe the contracted rate or the rate applicable for which thedeposit remained with the Bank, whichever is lower, less 1 percent penalty," IDBI Bank said.

Some others, including Indian Overseas Bank, do not imposeany penalty on premature withdrawals of FDs up to Rs fivelakh, but charge 1 per cent penalty for higher deposits.

Karnataka Bank and Dhanlaxmi Bank are also charging oneper cent penalty on early withdrawals.

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