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Understanding bank deposits

Larissa Fernand

Instead of leaving money in a savings account where you get a measly 4.5 per cent per annum, banks offer two types of deposits. The reason that they directly compete with the savings account is because of two factors: a higher rate of interest (you get the interest rates of a term deposit) and you do get the liquidity of a savings account (you can either break the deposit or take an overdraft on it). For short-term requirement of funds, take an overdraft. For long-term requirements, break the deposit. Here's how the deposits work.

For one, check out what deposits are on offer. Depending on the needs of the treasury department of the bank, the bank pays more for short-term deposits or long-term deposits. Some banks have been known to change interest rates thrice in a week. So a few maybe offer higher rates for short-term deposits while others may be offering higher rates for long-term deposits. Check to see which one matches your need. If you do have surplus cash which you don't need for a couple of years, then opt for one offering higher rates on long-term deposits.

Some banks allow you to break the deposit if you need money. Should you break the deposit, then you need not withdraw the entire amount but just the amount that you need. Assume you deposit Rs 9,000 in a three-year deposit. After one year you need Rs 5,000. So you break it and withdraw that amount and the balance Rs 4,000 will continue to stay in the deposit. The Rs 5,000 withdrawn will earn the interest only on the one-year period.

What you will have to check out here is whether or not a penalty is imposed. If you take the above example, if the bank wants to penalize you, it will give you the one-year rate less one percent. Secondly, besides the penalty, you will have to check if the bank will allow you to withdraw the amount you require. If the bank regards the deposits as multiples of a rupee, then you can withdraw right up the very rupee you require. If it is in units of 10, 50, 100 or even 1,000, then you can only withdraw in these multiples, which can be very inconvenient. So if you want Rs 1,250, you can take just this if the bank considers it in units of one, 10 or 50. If it is units of 100, then you can withdraw either Rs 1,200 or Rs 1,300. If it is units of 1,000, then the withdrawal will have to be either Rs 1,000 or Rs 2,000.

You can even take an overdraft on the deposit. Assume you deposit Rs 9,000 for three years. After a year, you are in need of Rs 5,000. You can take an overdraft of Rs 5,000. The Rs 9,000 will continue to earn the designated rate of interest, while on the Rs 5,000 you will have to pay the interest being earned plus two per cent more. So if you withdraw the Rs 5,000 for one-year, you will have to pay the bank a rate of interest for the one-year deposit plus two percent more. This figure of two per cent could vary between banks going up to three per cent. Some may even fix a standard rate of say 14 per cent per annum for the overdraft. Since you are earning interest on the money, the actual cost to you is just around two or three per cent. Pretty cheap for a loan.

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