Fixed Deposit: Loans against fixed deposit grow the fastest

2023-04-26 12:42:14

Fixed deposits aren’t just a safe way to park one’s savings, but are becoming a popular tool to borrow funds. As interest rates climb to a three year high, those who would have taken a personal loan or an unsecured business loan are resorting to borrowing over the FDs as collateral.

Loans against FDs rose 43 percent last fiscal year, the highest rate in nearly a decade, data shows and has emerged as one of the fastest growing retail loan products which have been driving the bank loan books. Outstanding portfolio of loan against shares are at Rs 1.13 lakh crore as of end February, up from Rs 79,349 crore a year ago.

Loan against FD (Fixed Deposit) is a type of secured loan where customers can pledge their fixed deposit as security and get a loan in return. The amount of the loan depends on the FD deposit amount. This can go up to 90% – 95% of the deposit amount.

“FD rates are at its peak and clients are investing their investable surpluses in FD for the last two to three quarters” said Soumitra Sen, consumer banking and marketing at IndusInd Bank. Weighted average interest rates on outstanding deposits have gone up by over 100 basis points in the last one year, latest RBI data shows.

The interest rate for overdraft on fixed deposits is generally 1-1.5% over & above the FD rate. The country’s largest lender State Bank of India for example charges 1% above the relative time deposit rate. “ So the client gets money at 8-9%…much cheaper than a personal loan or a business loan” Sen said.

Besides, many banks offer attractive features such as flexible payback duration, pay only when you use and interest is charged accordingly. Its sanctions are quick and most of the time application processing and disbursement is over the counter and even zero processing fee. Moreover, since the borrower does not break the deposit. He need not pay any penalty either.

Banks too are comfortable lending on such deposits as in addition to an exposure to a safe asset their resources- the deposits are intact even as they grow their loan book. Also, it is easy to monitor such assets as these loans are linked to their savings or current accounts in addition to having low risk weightage assets for the bankWith bank loans driven more by retail loans which have risen at a higher rate of over 20 percent than the sector average of nearly 15%, there are concerns about overheating of such loans. But bankers say that the delinquencies of such loans including loans against deposits are negligible.

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