RBI Tweaks Rule on Interest Rate for Unclaimed Fixed Deposits - Outside View by PersonalFN

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RBI Tweaks Rule on Interest Rate for Unclaimed Fixed Deposits
Jul 8, 2021

The Reserve Bank of India (RBI) has announced changes to the interest rate applicable on overdue domestic deposits. As per the new rule, if a Term Deposit (commonly known as Fixed Deposit) matures and the proceeds are unpaid, the amount left unclaimed with the bank will attract the rate of interest applicable to savings deposits or the contracted rate of interest on the matured FD (the rate at which FD was opened), whichever is lower.

Earlier, if the FD matured and proceeds were unpaid, the amount left unclaimed with the bank attracted rate of interest as applicable to savings account. The new rule will be applicable to all Scheduled Commercial Banks (including Regional Rural Banks), Co-operative Banks, Small Finance Banks, Payment Banks, and Local Area Banks.

Notably, interest on a saving bank account is usually lower than that of term deposits. However, interest rate on fixed deposits that mature within 2-3 months tend to be lower than interest earned on savings bank (SB) account. RBI's new rule aims to fix this anomaly and ensure that such accounts if overdue only attract the lower interest rate, a move which will prove to be beneficial for banks.

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Consider this, you had invested in a FD which matured 3 years ago on which you earned an interest rate of 7% but did not redeem or renew it. Now the interest earned on the deposit will not be 7%, but the prevailing FD rate, say 5% or the savings account rate, say 3.5%, whichever is lower. In this case, the SB rate will be applicable.

The RBI's move comes at a time when unclaimed deposits with banks are rising. According to a Livemint report, unclaimed deposits with banks were around Rs 18,380 crore in the calendar year 2019, up from Rs 14,307 crore in 2018. Public sector banks had the highest share of unclaimed deposits at Rs 14,971 crore, followed by private banks and foreign banks.

If the deposits lay unclaimed with banks for 10 years or more, they transfer it to RBI's Depositor's Education and Awareness (DEA) Fund.

Unclaimed deposit can arise when in the event of death of the depositor and if the family members/legal heirs are not aware about the investments. It can also happen if a person, for any reason, fails to keep track of deposits across multiple bank accounts.

This highlights the importance of keeping important documents in an orderly manner and informing your close family members about the vital information related to such documents. It also vital that you intimate your bank whenever there is change in contact details such as mobile number, e-mail address, and home address.

You can check if you have any unclaimed deposits by visiting the bank branch and submitting the relevant forms and KYC documents.

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Bank FD is a preferred choice of investment for many individuals, especially risk-averse investors, as it offers safety of capital. So, when your FD matures, it makes sense to renew it to avoid loss on interest. Notably, in this digital age, instances of unclaimed deposits are set to reduce since booking FD online offers you the auto-renewal option as well as the auto credit of maturity proceeds to the saving banks account.

However, it is important to pay attention to the following factors when you invest in a Bank FD:

1) The financial health of the issuer

2) Rate of interest the bank is offering

3) The tenure for which you want to deploy your money

4) Plans/ options such as Reinvestment of interest, quarterly payout of interest, monthly payout of interest, etc.

5) Flexibility to withdraw money before maturity

Alternatively, if the current interest rate on FDs is not attractive and you are willing to take slightly higher risk, you can redeem the deposit and consider parking the sum in debt mutual funds. But make sure you choose suitable and worthy schemes based on your financial goals, risk appetite, and investment horizon.

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Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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