Why ULIP mis-selling has become rampant ?

Non-callable fixed deposits (FDs) is a relatively lesser known investment instrument. In a non-callable fixed deposit, banks don’t allow customers to withdraw the deposit prematurely. However, the minimum deposit amount and interest rates are also higher than regular FDs.

“A non-callable FD comes with a fixed maturity date and one cannot withdraw money beforehand. The minimum amount required to open a non-callable FD is also higher, i.e., Rs 15 lakhs,” Shweta Jain, financial planner and founder of Investography said.

Minimum Investment & Interest Rates

While small finance banks ask for a minimum deposit of Rs 15 lakhs to open a non-callable FD, the upper limit goes up to Rs 2 crore. In contrast, the likes of ICICI Bank and Induslnd Bank demand minimum deposits worth Rs 2 crore and Rs 1 crore respectively.

“One of the major reasons why non-callable FDs did not become popular is the large ticket requirement for opening these FDs. Some of the major private sector banks have minimum ticket FD opening requirements like Rs 2 crore or Rs 5 crore for opening these non-withdrawable FDs. Hence, these FDs remain beyond the reach of retail depositors,” Sahil Arora, Director of PaisaBazaar.com said.

Since the funds are blocked till the maturity date, high interest rates are offered by the lenders. Punjab National Bank offers 5 basis points higher interest on a non-callable FD than a regular term deposit. This difference can go up to 25 points in case of small finance banks (one basis point is one-hundredth of a percentage point).They’re offering higher interest rates on non-callable FDs for select tenures.

ICICI Bank offers interest of 3.85%, 4.10% and 4.50% for 1 year, 2 year and 3-5 years respectively. While HDFC bank offers an interest of 5.6% on these deposits for a tenure of 1-5 years.

Portfolio Diversification
A non-callable FD can be a good fit for those investors who would like to diversify their portfolio with FDs. In this way, a part of their FD portfolio can get higher returns compare to other investments.

While the risk-averse investors may like to park their money within the safety net irrespective of the low interest rates, those who are willing compromise on the ease of liquidity – a non-callable FD may suit their long-term financial goals.

Beneficial for banks
However, if we look at it from a bank’s perspective, these assets are far better than any other instrument because –

> They help the bank in establishing a good asset and liability management system,

> They are a good source of funding for the bank.

With a view to fix the asset-liability mismatch, the Reserve Bank of India introduced non-callable deposits in 2015. Since these deposits cannot be withdrawn pre-maturely, the banks have higher clarity on interest earned on loans and the interest paid on FDs.

“Non-callable FDs were believed to improve the liquidity coverage ratio (LCR) of banks and thereby, meet the LCR requirements set by the Basel III framework,” Arora pointed.

Are non-callable FDs worth investing?
Jain believes that such deposits offer higher interest and can be a good option for long-term investors. “The advantage of non-callable FD is that the interest may be a little higher than a callable FD. But it helps to have this type of FD if you have a fixed goal for the next 1 or 2 years.”

But we as Indians, use FD as an asset class to park our surplus without taking much risk, hoping that this money can be withdrawn anytime if the need arises and non-callable FDs do not reflect the same characteristics, argues Prateek Singh, founder of LearnApp.com.

“No it is not really worth investing in them as the investor can not liquidate the asset prior to the maturity. Even though they provide better returns than callable FD’s one may choose to park the funds in debt schemes where money can be withdrawn anytime,” Singh explains.

Only in extreme cases of bankruptcy of the account holder, winding up of business or in case of a legal order, in the case of death – can one withdraw from a non-callable FD.

What should be kept in mind while investing in this product?

If you still want to invest in a non-callable FD from a long term perspective, remember that the minimum capital requirement for non-callable FDs is Rs 15 lakhs. Hence, only a restricted set of people can invest in this asset.

“Those wishing to open non-callable FDs should check their liquidity requirements as they won’t be able to close these FDs except for certain specified conditions. They should also compare the rates offered on non-callable FDs with those offered on callable FDs and should opt for the former only if the rates offered significantly beats the rates offered on callable FDs,” Arora asserted.

The finest attraction that bank FDs offer is the option of easy liquidity. By eliminating this feature, non-callable FDs automatically lose out in the first go.