There is no denying the fact that bank loans have become permanent companions of families, if not individuals. Be it personal need, self-employment venture or business need, banks have finance schemes available for every sector of the economy in their product basket. The money made available by banks in the shape of loans to their borrowers is actually the money of the banks’ depositors. In banking parlance, the money of depositors is liability for banks as they have to pay interest to the depositors on the money deposited by them. While, the money given in the shape of loans and advances to borrowers form assets of the banks as they earn interest on it.
Interest on loans varies from sector to sector and it has always been the endeavour of borrowers to hunt for loans having minimum cost (rate of interest). Besides, borrowers always look for ease of access to loans having minimal formalities in terms of documentation and eligibility criteria. In fact, it would always delight bank customers if loans are made available over-the-counter, especially in emergency situations.
Even as the modern banking practices at the back of advanced technologies have made certain categories of loans available at the click of a button, there is a way out for bank depositors to obtain loans at the lowest rate of interest, without processing charges and penalties. The repayment is no issue for the borrowers. It’s up to them to fix the repayment schedule. They can even ignore repayment of the loan taken.
Before coming to the exact nature of the scheme, let me share an anecdote.
A bank customer was having some fixed deposit (FD) instruments. Due to some exigency at his domestic front, he had gone to his bank to break these FDs before maturity. He was badly in need of cash to neutralize the exigency. Even as, according to him, he had approached his bank for some kind of short-term loan assistance, he was refused the facility for not falling under any suitable category of loan schemes. This had left him with no option but to apply for breaking his FDs before the due date (maturity). The bank, as per norm, paid him the money with a penalty – the rate of interest contracted for the maturity period was cut by a few percent. This way the depositor sacrificed a good amount of interest income.
There are many such depositors who are confronted with some emergencies at domestic or any other personal front and need cash badly to come out of these emergencies. It’s a very common sight in bank branches that you see these depositors breaking their FDs before maturity to meet their demands. Most of them need cash assistance on a short term basis. But we hardly find bankers discouraging these depositors from breaking their fixed deposit instruments before the due date. Though there is an option to provide loan against fixed deposit instruments. But the facility is not marketed to an optimum level.
Loan against deposits is one of the oldest banking practices. The scheme envisages that when you park your money in a bank fixed deposit, you can easily get a loan against it without having to break it.
Notably, Fixed deposit (FD) is an investment option with assured returns, making it a popular way of investing for many individuals with a low-risk appetite. As per the latest data, “At the end of February, there was 1. 13 lakh crore in outstanding loans against FDs, an increase from 79,349 crore in January. For the past two to three quarters, investors have been investing their surpluses in FDs at the highest FD rates.”
What exactly is the procedure for obtaining a loan against deposits?
As already stated above, a loan against deposit, be it a Fixed Deposit instrument, Cash Certificate, Recurring Deposit account or any other fixed deposit instrument is one of the most cost-effective and easiest accessible loans available at any bank. This option of obtaining a loan is useful in times of emergency when money is needed quickly.
It’s as good as a personal loan and you don’t need to state reasons for obtaining this loan which is disbursed as an Overdraft facility against your fixed deposits. If you have any of the fixed deposits and want a loan, you have to approach your bank.
How much can one borrow against these FDs?
Quantum of finance depends upon the amount parked in these FD instruments. Normally, banks offer a loan anywhere between 75 and 90 per cent of the deposit (principle as well as interest accrued). 10-25 per cent is maintained as margin. However, the percentage may vary from bank to bank.
What is the rate of interest charged on such loans?
This is the most convenient and cheapest way of obtaining a loan. The interest on such loans is charged on the amount drawn and not the limit set. Rate of interest varies from case to case. Normally, it is charged 2 to 2.5 per cent over the rate paid by the bank on your fixed deposit instrument. Some banks charge only one per cent over the rate paid on your FD.
For instance, you have a fixed deposit of Rs 2 lakhs earning an interest of 9 per cent a year. At 25 per cent margin, your overdraft limit is set at Rs 1,50,000. You can withdraw the amount at your will in one go or in instalments. The interest would be charged 2 percent above the rate paid by the bank on your deposit, that is 11 per cent. Remarkably, the interest would be charged only on the amount withdrawn not on the set limit of Rs 1,50,000.
What is the tenure of repayment?
The tenure of the loan, or we can say repayment schedule of such loan is directly related to the period of deposit. In other words, there is no specific tenure fixed for the repayment of the loan and you can avail of the loan till the FD, against which you have raised the loan, matures. However, during the repayment schedule, you are at liberty to repay it or not. If the loan remains unpaid till maturity of the FD, the loan along with interest is adjusted against your fixed deposit proceeds. No other charges/fees are charged in such loans.
Any tax benefit of the loan?
If you are running a business, you can seek help from your financial consultant to derive tax benefit out of such loans. For example, as stated by a tax consultant, the interest paid on loans raised against deposits by a businessman or a self-employed individual can be included in the books as business expense from their business income. The condition is that the amount of loan raised is invested in the business.
Meanwhile, those who have invested in a post office time deposit instrument, they can also avail loan against the said deposit from some banks at the time of need. However, the percentage of loan against the said deposit would be less than the bank FD instrument.
To conclude, the banks are laying emphasis on selling various products and services to their customers. This loan against deposit facility also needs to be propagated among the general customers, especially those who have invested in FD instruments. Before breaking the FD before maturity to meet any immediate need, this nature of loan facility is hassle free and cheap to avail.