Let me share an off-beat query from one of the readers. He 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 needed 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 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 due date (maturity). This way he 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 short term basis. But we hardly find bankers discouraging these depositors from breaking their fixed deposit instruments before the due date.
There is absolutely a solution for the customers to meet their immediate cash requirements without breaking their FDs. It’s one of the oldest banking practices that when you invest in a bank fixed deposit, you can easily get a loan against it without having to break it. 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.
How much one can 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. 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 10.5 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 installments. The interest would be charged only on the amount withdrawn not on the set limit of Rs 1,50,000.
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.
As we are into the tax season now, let’s look at the tax benefit of such loans. If you are running a business, you can seek help of 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 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.
(The views are of the author and not that of the institution he works for)
sajjadbazaz@greaterkashmir.com