IOB revises deposit rates

Indian Overseas Bank has raised deposit rates over various maturities. Earlier the bank revised the deposit rates on 13^th December, this is the second time in the month that the bank has raised fixed deposit rates.

The rate has been raised from 3 to 3.5 percent for a deposit of seven to seventeen days. That of 15 to 29 days has been raised 4.5% from 3.5%. for 91 to 120 days now the rate is 6% earlier it was 4.5%. a few more changes have also been amended in the interest rates by the bank. The bank is providing an extra of 0.75% to the senior citizens on all the term deposits.

BoI hikes interest rate of fixed deposit by 75 bps

Bank of India, a public sector lender has raised its fixed deposit rates by up to 75 basis points for various maturities.

The revised rates have come into effect from 1 Nov, 2010.

The bank has revised rates ahead of the Reserve Bank’s second quarter policy review.

After revision, the interest rate for 91-179 days, will be higher by 75 basis points at 6.25 per cent for all deposits less than Rs one crore, BoI said in a filing to the Bombay Stock Exchange.

While, for deposits of 180-269 days the interest rate has been hiked by 50 basis points to 6.50 per cent.

For deposits between 270-364 days, the rate has been hiked by 75 basis points to 6.75 per cent and for all deposits for 1 year to less than two years, the rates has been raised by 50 basis points to 7.5 per cent.

Indian Bank hikes deposit rates and base rate

Indian Bank has hiked its deposit rates and base rate. The deposit rates have been raised by 50 to 75 basis points on shorter maturities while base rate has been raised to 8.5%.

Bank Chairman and Managing Director TM Bhasin informed in August the bank had raised rates for deposits above two years to 7.75 percent.

According to bank release, the hike in interest rates has not been done for agricultural sector under interest subvention scheme and the Bank’s special schemes under poultry and fisheries.

It added even loans to micro industries have also been exempted partially.

Allahabad Bank revises interest rate for 500 days tenure

Allahabad Bank, a public sector bank has revised its domestic term deposit interest rates. The rates have been revised of below Rs 1crore and will be effective from 27 September, 2010. For 500 days tenure the interest rate will be 7.50 per cent per annum. The interest rates of the remaining tenures have not been changed. The revised rate will be applicable for fresh deposits and renewal of deposits.

Kotak Mahindra Bank raises deposit rates by 0.25%

Last week again, RBI has raised its short-term lending rate (the repo rate) by 25 basis points and borrowing rate (reverse repo) by 50 basis points, as a result banks will again raise fixed deposit rates also lending rates. But banks plan to revise rates in October.

Kotak Mahindra Bank, a private sector banks has taken lead in raising its fixed deposit rates. On Tuesday bank increased the term deposit rates by 0.25%. On the other hand, on Monday Yes Bank raised its benchmark prime lending rate (BPLR) by 50 basis points to 17.5%.

Kotak Bank has revised its rates for all tenures with maturities of 1 year and above with immediate effect.

KVS Manian, group head Kotak Mahindra Bank told FE, “Our deposit rate hike only reflects the upwards interest rate bias in the market. However, we have not yet decided on hiking the lending rates. We may revise our BPLR and base rate both in the early October this year.”

Bank reported credit and deposit growth at more than 30% year-on-year basis. After revised rates for one year term deposit the interest rate is 7.25% while for five years and above, the rate of interest is 7.75%.

MF houses launch new FMPs, offer high interest rate than bank FD

With rising bank deposit rates, mutual fund houses are also making a beeline to attract investors by offering new fixed maturity plan (FMP). In the past 15 days, companies such as Tata Mutual Fund, Birla Sun Life Mutual Fund, Taurus Mutual Fund and IDFC Mutual Fund have been opened for subscription of eight new FMPs.

Almost all mutual fund companies have launched fixed-term plans of varying maturities ranging between 91 days to 1-year tenure.

Fund houses provide options of different maturity periods to the investors so that they can park their money depending on their requirement for capital.

Fixed term plans invest in debt securities in which the returns are locked in the beginning of the plan so the interest rate risk is reduced by a good measure.

According to fund managers present levels are good for investment in fixed-term funds.

FMPs have two features one is FMPs offer slightly higher returns than bank fixed deposits (FDs) and are not unstable as equities.

Naval Bir Kumar, managing director of IDFC Asset Management Company said, “This is a good time to invest in fixed maturity plans as the interest rates are high. If rates keep moving up, we will launch new plans.”

Short-term yield on debt instruments such as commercial paper is between 7 and 8 per cent.

If we calculate the gross yield, after deducting asset management expenses, the gross yield can be anywhere between 6.5 and 7.25%. Fund managers cannot give indicative returns on fixed-term portfolios.

As per latest hike fixed maturity plans for 90 days can offer returns upwards of 6 per cent, while fixed deposit for 90 days tenure are offering 4 per cent interest.

Returns gained in FMPs depend on portfolio construction and in which instrument(s) money has been invested.

Alok Singh, head (fixed income) of Fortis Mutual Fund said, “Fixed-term plans become attractive when short-term rates move up. FMPs though come with a rider of no liquidation. Unlike open-ended funds where investors can go for redemption, money in FMPs is locked up for the tenure of fund. Investors who have three months to one-year investment horizon can earn high yields at maturity in a FMP.”

RBI report says, increase in bank deposits by 14.44 per cent

As per data available, by fortnight ended August 27, there was increase in bank fixed deposits by Rs 38,658 crore as against a decline of around Rs 8,000 in the previous fortnight, which shows recent raise in deposit rates by banks have succeeded in attracting the customers.

As per the Reserve Bank of India (RBI), latest data, there has been an increase of 14.44 per cent on a year-on-year basis, in bank deposits.

RBI in first quarter monetary policy review had asked banks to improve deposit growth therefore, banks started raising rates. Most banks have raised rates of short- and medium-term fixed deposit by up to 150 basis points.

In its policy review, RBI has projected 18 per cent deposit growth for 2010-11 but deposit growth has not exceeded 15 percent in this financial year.

During the fortnight bank credit had come down by Rs 13,114 crore. At the end of fortnight bank credit had increased by 19.4 percent on a year-on-year basis. And the outstanding bank credit was reported to be at Rs 33,51,396, against Rs 28,06,741 crore at the end of the previous fortnight.

Bankers are expecting modest credit demand in the current quarter. However, there has been increase in demand during the first quarter of the financial year, mainly because there was huge demand from telecom companies for 3G and broadband wireless access.

A senior public sector executive said, “Credit flow may not have happened from the banking system but corporate have availed of the alternate sources. They have raised funds from other routes like commercial papers (CPs) and mutual fund.”

Moreover, last month profits on CPs touched to one-year high as banking system had shifted to base rates as corporates had no means to raise short-term capital.

A senior executive of another public sector bank, “Demand for credit is not robust. We had expected a moderate credit growth in this quarter. With funds flowing from other sources to the commercial sector, demand from banking will be slow for some more time.”

Although for the current financial year the apex bank has projected 20% growth in credit.

Number of banks has also raised their benchmark prime lending rates (BPLR) in order to encourage more customers to move to the base rate system. The base rate system was introduced from July 1. Till now, the borrowers have not shifted to base rate system.

Thus, during fortnight there has been increase in deposit growth and drop in credit growth, banks’ investment in government securities has also moved up by Rs 23,674 crore.

What is a fixed maturity plan?

Fixed maturity plans, or FMPs are investment schemes floated by mutual funds. Similarly to bank fixed deposit (FD), FMPs have different maturities like three months, six months, one and two years and rarely for three years.

FMPs are invested in instruments of matching maturity therefore investors get a rough idea how much returns he will earn at the time of subscription. There is a lock-in-period therefore investors get protection against interest-rate risks.

Moreover, on FMPs with a maturity of over one year investors get tax advantage over fixed deposits. In FMPs, investors get an option to pay tax on long-term capital gains at 10% without applying indexation or 20% after applying indexation to the cost of acquisition.

On the other hand, investor has to pay tax on interest earned from FDs according to his tax bracket. But, FMPs don’t offer assured return or capital protection, as investor get in bank FDs.

Before investing in FMPs there are few things which should be taken into consideration. Two years ago, during the economic crisis many fund houses got into trouble as they had invested in low-rated papers from dubious companies, mainly in the real estate, so it becomes very important to check the reputation of the fund houses. However, fund houses managed to come out safely from the terrible situation as the regulator intervened in the matter and led a helping hand to them.

These days’ investing in FMPs is risky as you will neither have an indicative portfolio nor return so everything will depend on the integrity of fund houses.

Generally an investor should not exit till FMPs get mature, but fund houses now days list FMP on stock exchanges so that investors can easily exit if they are in urgent need of money. In this there is no guarantee of enough liquidity and get good value.

Therefore, investment in FMPs should be made only when you are prepared to take a little risk to earn bigger tax- efficient returns.

No investors for higher rate FDs

After the Reserve Bank of India raised its key rates on July 27 the banks started raising their fixed deposit rates but in the 15 days to August 13 there has been no improvement in the growth of the deposits.

According to RBI data deposit growth has declined by Rs Rs 8,016 crore in the fortnight to August 13 to a total outstanding of Rs 46,39,595 crore, translating into a year-on-year growth of 14.1 per cent.

RBI in its monetary policy meeting with bankers had expressed its concern over low deposit growth and had told banks to improve their deposit mobilization to avoid any asset-liability mismatch as a result, banks getting signal from RBI raised interest rates on short-and medium-term fixed deposits by as much as 1.5 per cent.

Although, in the 15 days ended August 13 after a temporary decline last fortnight bank credit growth has moved up to 20 per cent mark.

As per RBI data, banks have witnessed credit growth of 20.13 per cent on year-on-year basis at the end of the fortnight. Thus, outstanding bank credit amounts to Rs 33,57,265.34, as against Rs 28,05,224.26 crore at the end of the previous fortnight.

However in the first quarter of the financial year banks credit growth had spiked when telecom firms demanded for the 3G and Broadband Wireless Access spectrum auctions. But bankers are hoping of moderate credit growth in the current quarter. The apex bank had predicted 20 per cent growth in credit for the current financial year.

Many banks have increased their benchmark prime lending rates with an aim to persuade more customers to switch to base rate system. From July 1 banks have introduced base rate system, but till now the customers have not switched to base rate.

Floating rate FD not beneficial for senior citizens

For most of the senior citizens fixed deposit is the most preferred investment instrument as they give assured returns. But banks are launching new floating interest rate regime for fixed deposits and country’s largest lender has taken lead in this by launching the floating rate fixed deposits.

Investing in floating rate fixed deposits might not be as beneficial as the usual fixed deposits. The floating rate FDs return will be linked to the base rate. In India the interest rate scenario is very unstable the rates are revised quarterly or half yearly.

SB Mathur, former chairman of public life insurer Life Insurance Corporation says, “Retired people do not need uncertainty but certainty. It doesn’t matter if returns are a little lesser all they require is assured returns.” He added senior citizens will have difficulty in planning their future income in the floating products regime.

Senior citizens look for risk-free assured returns and easy liquidity in FDs. But the new regime of interest rate will bring in risk factor as returns will be based on base rate, which will change according to RBI’s policy rates, macro-conditions and banks’ other statutory fund costs that could fluctuate nearly every quarter.

From July 1, the base rate system has been introduced under which the banks cannot lend below the base rate. In order to ease the risk, SBI has come up with base fate fixed deposit schemes, which will slowly gain momentum in the coming days, according to bankers.

Allen Pereira, CMD of Bank of Maharashtra points out, “As long as these products are optional, it’s fine. Consumers should have the maturity to choose what they want.”

Union Bank CMD MV Nair said, “People will have to learn to live on market-driven returns unlike the current scenario of assured returns. Since the base rate is linked to inflation, it’s a double-edged sword. Income may go up if prices firm up. But there are chances that they may go down if prices start easing.”

However in all the developed markets, the returns on FDs are linked to the market but in India it is just in initial stage, an optional proposition. If this product is able to make a good start probably the plans with assured returns may be driven out, informed an anonymous senior banker.

“Fixed-rate returns may become history over the next few years as banks are likely to focus more on market-linked deposit rates to reduce the risk of asset-liability mismatch,” he said.

In the Indian domestic market the total deposits in banks account to Rs 46 lakh crore, out of which 65-70% comprises fixed deposits, as per industry estimates.



Currently, total deposit in banks in the domestic market stands at Rs 46 lakh crore, of which 65-70% comprises fixed deposits, as per industry estimates.

People investing in bank FDs, company deposit schemes

In the past most people preferred to invest in equity market for long term gain but it as been around two years that there has been instability in the equity market which has forced investors to look for safer investment instruments such as fixed deposits. Fixed deposits provide guaranteed safety of money but the returns are lower. Again the interest rates on fixed deposit are rising after the Reserve Bank of India tightened policy rates and banks are raising rates on fixed deposit schemes to garner more low-cost retail deposits.

Most of the big commercial banks such as SBI, ICICI Bank, Axis Bank, HDFC Bank, etc have raised rates on fixed deposits by 50 to 75 basis points. According to marker experts the rates are expected to rise further as liquidity gets tighter and credit growth picks up.

Even the leading non-banking finance companies (NBFCs), such as Shriram Finance and Dewan Housing Finance Company, have also started raising retail fixed deposits interest rates – up to 2 per cent higher than rates offered by banks. Shriram Transport’s fixed deposit scheme, called Shriram Unnati Fixed Deposit, is offering 8.75 per cent per annum interest for a year. Minimum investment requirement under this scheme is Rs 25,000 and the last date of scheme is August 31. Another company Dewan Housing is offering 9 per cent interest on fixed deposits of 1-year tenure.

While most of the banks are offering 5.5 per cent of interest for 3 to 6 months, 6.5 per cent on deposits for 6 months to 1 year and 7.25 per cent for above 1 year.

NS Srinath, executive director (retail) at Bank of Baroda, told Financial Chronicle that the interest rates will move up further. He said, “I see interest rates stabilizing at this level or go up a little. A fixed deposit is definitely a good investment instrument in the short and medium terms. With the volatility in the equity market, fixed deposits in the range of one year is a good bet. It is little premature to say if interest rate hike has led to growth in our deposits. But we have a target of 22 per cent year-on-year growth in deposits.”

According to wealth adviser and certified financial planner, Gaurav Mashruwala, except FD there is no other investment instrument that can give you guaranteed returns. He said, “Equity investment is risky in the short term, but it offers good gains in long run. While FD is a safe bet for short term, there is no return in the longer term.”

Mashruwala say FD is the best investment option for investors in the low or middle tax brackets, mainly falling in the 10 to 20 per cent brackets.

Kartik Jhaveri, a certified financial planner said corporate fixed deposits are safe and very little risk is involved in them also most of the companies are offering good rates.

Financial experts say deposit rates can rise further so don’t invest in long term FDs

Banks are raising their lending rates and fixed deposit rates since the time when RBI raised repo and reverse repo rates. Till now most of the banks especially the big commercial banks have raised their loan and fixed deposit rates, the increase by SBI is quite sharp.

After a long period investors in fixed deposits (FDs) will feel happy seeing the rates moving up. But market experts caution the investors in FDs that they should not hurry to invest in FDs aggressively it is just the beginning.

For instance, HDFC Bank has raised rates for 1year and 2 year deposits by 25 basis points to 7.5 per cent and 7 per cent, respectively. Bank has done the biggest rise for 6 months tenure, by 75 basis points.

The SBI has raised its rates between 25 and 150 basis points. The bank has done the biggest rise for the 15-45 day tenure, the rates has been increased from 2.50 per cent to 4 per cent i.e. by 150 basis points.

For 1 year to less than 2 years bank has raised rates by 125 basis points- from 6 to 7.25 per cent. For 181 days to less than a year, the rate has been raised from 5.25 per cent to 6 per cent.

According to financial planners the rate war can get hotter. Govind Pathak, director, Acorn Wealth says, “Don’t invest in FDs of more than one year. Also, don’t invest the entire holding in a single FD.”

He said one can divide large amount into small portions. For instance, Rs 1 lakh can be divided into four deposits of Rs 25,000 each. If the interest rates increase in, say, the next quarter, then you can withdraw the money from two deposits and invest in other higher-paying FDs.

Along with deposit rates the lending rates are also rising. The market experts say banks are reluctantly hiking lending rates because the retail lending has not taken off. According to many the teaser rates can sooner or later be withdrawn.

Currently, SBI is offering a teaser rate of 8% for the first year and 9% for second and third years. After that, the rate will be linked to the base rate. Likewise HDFC is also offering teaser rate at 8.25% in the first year and 9.25% in the second year. Then, the rate will be linked to the retail prime lending rate.

The experts caution home buyers that they should not rush for teaser rates, especially for buying an under construction property. Kartik Jhaveri, director, Transcend India said, “Potential home buyers need not rush to take that home loan, whether it’s a teaser rate or not, simply because it is a 15-20 year decision.”

He says if one plan to buy ready to possess property then going for teaser rates is good idea but for under-construction property a teaser rate scheme is not a good idea as EMI or interest payment of loan will start now. When the loan is disbursed entirely in the next two-three years, the teaser rate might no longer apply.

Jhaveri adds, “You will be stuck with the conditions of the teaser rate scheme that may be adverse compared to the base rate regime.”

SBI has launched a new product – floating rate term deposit linked to the base rate- according to market experts it is a novel idea. But they differ on the point whether retail investors should get into these products or not. Suresh Sadagopan, a certified financial planner says, “The basic reason for investing in a fixed deposit is assured returns. Any product that does not give assured returns is not meant for small investors.”

According to Pathak, director, Acorn Wealth, one can go for this product but only for one or two years. He explains, as interest rates are rising for some time therefore it makes sense to be in these products. Pathak says, “In a falling-rate regime, these may not make much sense.”

SBI under its new scheme is offering a floating rate of 7, 7.25 and 7.5 per cent for 1, 2 and 3 years, respectively. While Housing Development Finance Corporation has two such products- a regular product for individuals and a systematic savings plan.

SBI is offering 6.9-8.25 per cent for different tenures. The HDFC had launched the scheme 6 months back which allows people to invest in parts, just like a recurring deposit. Thus you can invest as little as Rs 2,000 to as much as Rs 50,000 for 24 to 60 months. The rates vary from 7.25 to eight per cent (two-five years). Last year Indian Overseas Bank also introduced similar product.

Some banks asking to open fixed deposit to be eligible for credit card

After global financial crisis the banks have cut down their credit card portfolios. Now they prefer to issue credit card to people with sound and high income. Some banks have made a new rule that people who earn less than Rs 30,000 a month can not apply for credit card. Moreover they want some “sound” previous relationship before considering the card application.

Two years ago the bank agents used to chase people to sell credit cards and the cards were given free for lifetime. Now banks are charging range of fees, including for joining and annual maintenance.

An HSBC Bank official told Business Line told, “We are issuing cards on a selective basis as it is an unsecured portfolio.”

ICICI Bank is also going slow on cards, with just about five million in circulation now compared with nine million two years ago.

ICICI Bank says, “ICICI Bank issues cards to both customers and non-customers, subject to fulfillment of credit appraisal norms. We have a full suite of cards products, one of which is a Secured Card (which is for customers with an FD).”

The banks are following this trend because all credit card issuing banks had faced defaults when there was slowdown in country economy. Since then banks started picking out a number of defaulting cards.

According to RBI figures, as on May 2010 the number of credit cards in circulation was 19 million low as against peak of 27 million in June 2008.

A senior banker said, “Now, for many banks, it is more a question of being in the card segment rather than making profits.”

IDBI Bank raised BPLR and term deposit rates

IDBI Bank, a state-owned lender has raised its benchmark prime lending rates.

It has revised its BPLR by 50 basis points and it will be effective from 5 August, 2010.

The bank release said, the interest rates on retail term deposits have also been raised by 25-75 basis points on different tenures. The revised rates will be effective from August 6.

HDFC, Central Bank, Allahabad bank raised deposit rates

The Reserve of Bank has raised policy rates therefore banks have started raising deposit rates ranging from 25 to 75 basis points.

HDFC Bank has raised deposit rates by 75 basis points with effect from July 30, the Central Bank of India has raised rates by 50 basis points which have come into effect from August 1.

Other banks that have raised their deposit rates include Lakshmi Vilas Bank and Allahabad Bank by 50 basis points, effective from August 1.

One (1) basis point is equivalent 0.01 percentage point. State Bank of India (SBI) will be raising its deposit rates by about 0.25 per cent in August-September.

HDFC Bank has raised rates of 91 days and 6 months deposits to 5.25 per cent from 4.5 per cent, for tenors of 9 months to 1 year the rates have been revised to 6.5 per cent as against 5.75per cent.

In the coming days more banks are likely to raise their deposit rates. As the banks have started raising deposit rates therefore their cost of funds will also increase as a result the banks will raise lending rates also. Meanwhile, most of the banks are not willing to raise lending rates due to comfortable liquidity but when the credit offtake starts picking up, banks will hike lending rates in home loan, auto and commercial loan segments.

There have been indications that HDFC Bank, the mortgage major might hike the second year lending (fixed) rate by 25 basis points to 9.25 per cent. At present it is offering housing loans at 8.25 per cent fixed rate for the first year (up to March 2011) and second year at 9.0 per cent.

SBI Chairman O P Bhatt told reporters, “There is an upward bias on deposit rates. They should move up by August-September by at least 0.25 per cent.” On the other hand RBI Governor D Subbarao had said after raising short-term lending (repo) and borrowing (reverse repo) rates by 0.25 and 0.50 per cent respectively, “We expect credit to be dearer ... As credit demand picks up, we expect lending and deposit rates to go up.”

Central Bank of India Chairman & Managing Director S Sridhar said “We have lost business for not lending below the base rate of 8.0 per cent, which we were doing it earlier.” Responding to a question, he said, “As of now high cost deposit with us is zero. We have gradually reduced it over a period. We could have mobilized high cost deposits of up to Rs 5000 crore recently, which we have lost to other banks.”

Private lenders to hike deposit rates in coming months

Few days back the Reserve Bank of India (RBI) raised its key policy rates as a result private sector banks are in the process of gearing up for a deposit rate hike.

Private banking sources said, most likely the private banks in the coming months will be hiking deposit rates before switching to base rate system for lending.

Moreover by raising deposit rates these banks will be able to mobilize their funds in more efficiently to meet the credit demands in the system, burdened with liquidity crunch.

Ashish Parthasarathy, treasurer at HDFC Bank pointed out, “After the recent hike, RBI is expected to increase both repo and reverse repo once again by 25-50 basis points in the next monetary policy. Banks are expected to raise their deposit rates soon.” He added, the hike in deposit rates will help the banks in achieving their deposit growth target.

In the past few months, the banks have witnessed decline in the growth of deposits. For the fortnight ended June 18 banks deposits rose up to 13.92%, as against 14.34% y-o-y in the previous fortnight.

PC John, executive director, Federal Bank said, “Our asset liability committee will review the interest rate situation in its July meeting. We are also keeping a close watch on what other private banks are doing to stay competitive”.

RVS Sridhar, president & head markets (treasury), Axis Bank, said, “Banks will increase deposit rates depending on their fund requirements for credit offtake. The system is currently going through a liquidity crunch.”

Benefits of Senior Citizen Savings Scheme

In the second half of 2004, the five-year Senior Citizen Savings Scheme (SCSS), was launched. This scheme became a big hit as it offered higher returns.

Now, most of the investor’s schemes who had invested in the initial time period will be maturing in the coming days. Thus it becomes important to relook at these schemes before thinking of reinvesting in them.

On this scheme the rate of interest offered is 9%, which is quite high, in comparison to the existing rates. This return is paid to the investor every quarter. As for the high rate of interest, there is no other scheme for senior citizens offering such high interest rate.

For instance, on the bank fixed deposit for long tenure the interest rate is offered in the range of 7-7.5%. Therefore, it will be better to invest in the same scheme.

In this scheme the initial investment is done for a period of five years, thereafter it can be extended only for three year. And for extension a form has to be filled in the respective bank or post office where the investment has been done.

The other benefits of the scheme are – along with high returns and safety of money, there is a tax benefit. The investment of up to Rs 1 lakh is eligible for a deduction under section 80C of the Income Tax Act.

But in the recent revised Direct Tax Code it has not been clarified that, this benefit will continue or not. Investors should contact their respective bank or post office to get clarification on this, in order to continue getting the tax advantage.

The senior citizens who are of 65 years and above should invest the maximum possible amount in this scheme, because they come in the highest tax bracket, and if the returns from this instrument do not exceed their basic exemption limit of Rs 2.4 lakh, they can earn tax-free returns.

This scheme has one major negative aspect. It lacks liquidity. In this scheme investors cannot withdraw, when they wish to. In old age, people might need sudden influx of cash for medical or other needs, but they cannot withdraw before maturity of the scheme. Moreover, in this scheme transfer facility is not available.

There are few schemes that offer protection as well as high returns for individuals. So till the initial Rs 15 lakh limit per person is utilized by the individual, it is a good choice.

But, for people who have a higher amount for investment, this scheme is not adequate from investment point of view as well as for generating higher returns.

The other debt options have some point which makes a choice difficult for the senior citizen. For example the monthly income scheme of the post office has a maximum investment limit of Rs 4.5 lakh for a single individual.

In monthly income plan of a mutual fund there is no guarantee of any return. And, if the conditions are not favorable as are now, then, there might not even be any payout. Other bonds and debentures will not ensure a regular cash flow that meets a senior citizen's needs.

In comparison to these alternatives, SCSS is best to earn regular return.

Deposits likely to rise due to rise in repo rate

The Reserve Bank of India (RBI) has raised its key policy rates it is expected that it might bring cheers to depositors.

It is believed the increase in the repo rate is likely to raise corporate bulk deposit rates. In June bulk deposit rates had risen as much as 125 basis points, better than retail deposit rates, but it was temporary because of outflow of money from the system due to advance tax and 3G auction payments.

According to bankers due to rise in repo rate, increase in bulk deposit rates will be more permanent. T Y Prabhu, chairman and managing director of Oriental Bank of Commerce pointed out, “As a result, both short-term borrowing and short-term lending will become expensive.”

According to M D Mallya, chairman and managing director of Bank of Baroda hike in repo rates by RBI might not prompt any immediate increase in lending rates. “AN Increase in deposit rates may be a possibility”.

On the other hand SBI Chairman O P Bhatt had said that bank might think on raising deposit rates after the first quarter review of the monetary policy on July 27. The RBI had clarified that it want rise in interest rates to tackle rising prices and to give better returns to savers. RBI Deputy Governor K C Chakrabarty said on Friday, “We have to give better return to savers. The credit growth is higher, inflation is picking up, and so we have to curtail credit demand.”

According to RBI report between April 1 and June 18, banks were able to raise Rs 24,715 crore deposits which was below than the comparable period of last year, which was Rs 1, 31, 354 crore.

By June end banks deposit growth was 13.9 per cent which is much less than the RBI’s projected 18% growth, in spite of deposit growth in 12 months.

Corporates investors prefer FMP, banks to re-look at fixed deposit schemes

Most of the corporates prefer investing in fixed maturity plans (FMP), offered by mutual fund houses as these provide maturity at shorter terms while offering competitive profits. Therefore banks have started re-looking at fixed deposit schemes offered by them.

Recently Religare Mutual Fund, Fidelty Mutual Fund, HDFC Mutual Fund and Axis Mutual Fund have launched fixed maturity plans with maturity periods ranging from 90 days to 370 days.

According to Asit Pal, executive director of the Corporation Bank, “Definitely we will have a re-look at the performance of fixed deposits against fixed maturity plans. But we also need to get a clear picture about the market share of FMPs.”

He added, “Fixed deposit schemes have performed better last year. Although it was little dampened on the retail side, performance of high value clients investing in FDs was quite good.”

However, FMPs are favorites with corporate investors due to shorter maturity periods. But a section of corporate investors do prefer fixed deposits for better returns. Nilanjan Dey, Wishlist Capital Advisors said, “Corporate investors look for convenience in investments. So it has a chance to become popular again this time,”

Debjiban Basu, general manager (treasury, international banking & accounts) of United Bank of India, say corporates main concern is of liquidity. “If they are looking for easy liquidity and some interest then fixed deposits are better instruments for them. There is an upward trend of the yield in the market. Moreover, corporates are also looking at minimizing their MTM losses.”

Salil Datar, head (branch banking) of Dhanlaxmi Bank, points out corporates mostly prefer short-term FMPs with a maturity of about 90 days. He said, “Suppose an FMP offers a yield of 6-6.3% on a 90 days maturity period, its post-tax return will be around 4.8-4.9%. For a fixed deposit of similar tenure with an estimated yield of 5-5.5%, post tax return is around 3.6%. So for shorter term FMPs are a favorite with corporate investors.”

He added, “But I do not think corporates will be much interested in FMPs with maturity period as long as 370 days. Fixed deposits have an edge over FMPs there.”

D Sarkar, executive director of Allahabad Bank, stated, “We might consider increasing yield on the fixed deposits by 25-50 basis points. But that is not with an intention to compete with FMPs.”

You get option in tax-saving FDs

The government has revised discussion paper (RDP) on the direct taxes code (DTC) after it got pressure from all section of people. The discussion paper contained some provisions especially related to the proposed exempt-exempt-taxed (EET) method of taxation that will provide relief to taxpayers.

Here we will discuss in brief about EET. EET is a tax system in which an investment in a tax-saving plan and interest earned on it is deductible from income. The maturity amount is also taxable. While in the current EEE system no tax is charged on investment, interest and the maturity amount. But in the new provision the Public Provident Fund (PPF) and company provident fund (PF) balances has been brought under EET method of taxation. Due to which there is major apprehension and anxiety among taxpayers. Though DTC had provided for a grandfathering clause, it was deemed woefully inadequate.

According to the original provisions of the DTC, on the withdrawal of any amount of accumulated balance in PPF/PF as on March 31, 2011 people don’t have to pay tax. But, in new contributions as well as on accumulation on or after the commencement of the DTC (April 1, 2011) will be subjected to the EET method of taxation. And everyone knows that as per rules no one can withdraw entire PPF balance at one go from its account except on maturity. Thus for most investors, only a part will be tax-free, while on all interest and accumulations post March 31, 2011 tax have to paid upon withdrawal or maturity.



Now in RDP it has been stated that PPF and PF will remain tax-free even under the new DTC. Moreover, any investments made before the date of commencement of the DTC, in instruments which comes under EEE method of taxation as per the current law will continue for the full duration of the financial instrument. This is the main point of worry for the investors.

Banks might hike fixed deposit rates by Sept

According to the Reserve Bank of India's (RBI) latest report the total deposits of banks have dipped by Rs. 4,997.08 crore to Rs 45,26,220.20 crore as on May 21, 2010 as compared to Rs 45,31,217.28 crore registered on May 7, 2010. The RBI estimation takes into account the resources needed to meet credit offtake by the private sector and government borrowings along with growth and inflation outlook.

However experts believe the decline may end soon. Indraneel Sen Gupta, economist in BoA Merrill Lynch, says, “We expect a bottoming out by September (and the figure could touch) to 18.2% by March 2011.”

According to Mridul Saggar, chief economist, Kotak Securities, at present bank deposits growth is below comfort levels. Referring to the RBI projection made during the annual monetary policy review, Saggar said, “If this continues, the full-year target of 18% won’t be reached.”

Moreover the government borrowings are high this year, credit growth is also expected to be higher than last year at 20%.

“Interest rates on deposits are too low now and in some time banks would have to consider their sources of funds and take a decision on deposit rates so that they are in a position to meet credit growth targets,” said Saggar.

Thus Sen Gupta believes banks will be hiking deposit rates by September.

OP Bhatt, chairman and managing director, State Bank of India,India’s largest commercial bank, said that banks will hike their deposit rates because banks will need money to meet credit demand. However Union Bank of India has already raised its interest rates on bulk deposits for 1 year to 6.5% from 6% earlier.

S Govindan, general manager, Union Bank of India said, “We revised the rates on bulk deposits for 1 year in line with the certificate of deposit rates.”

In mid-April the bank hiked its retail deposit rates to 7.5% for 5 years, 7.25% for 3 years and 6.5% for 1 year.

“We are continuing with these rates for now and will take a call when markets start showing signs ofliquidity crunch,” said Govindan.

ING Vysya Bank raised its interest rates by 0.50 to 1.25 per cent

ING Vysya Bank has raised its interest rates by 0.50 to 1.25 per cent on select tenures. According to bank release the revised rates will come to effect from June 4, 2010.

The rates have been revised by 5.25 per cent from 4.75 per cent for deposits with a maturity slab of 92-182 days. It added, the revised rates for the 184-364 days maturity slab is 184-364 as against the earlier 5 per cent.

While on 366 days to less than two years, the rate has been increased to 6.50 per cent from 5.25 per cent, and for 730 days to 10 years, the new rate is 6.75 per cent against the earlier 5.75 per cent.

The release said the senior citizen will provided an additional 0.25 per cent.

Axis Bank reduced interest rates on long tenure deposits

Axis Bank, country’s third largest private sector lender has announced cut in its deposit rates by 25-50 basis points (bps) across select longer-dated maturities. Bank said at present the liquidity situation is not as harsh as it had previously anticipated therefore it decided to reduce the deposit rates.

The rate has been reduced of two years to 30 months by 25 bps to 7.0 per cent and on 30 months to three years maturity the rates has been reduced by 50 bps to 7.0 per cent. The revised rates have come into effect from May 22.

“We initially raised rates, thinking the liquidity situation will be harsher than it is. But interest rates have not risen to that extent and, so, we decided to reassess the situation and cut rates on the two long-term maturities,” said R V S Sridhar, senior vice-president of treasury, Axis Bank.

In the past two months it is the second bank to reduce its deposit rates, earlier in mid-April Bank of India reduced its interest rates for deposits above Rs 1 crore.

According to some of the bankers, in spite of temporary liquidity squeeze on account of advance tax and 3G spectrum payments, there is less possibility of increase in medium and long term deposit rates over the next two-three months.

B A Prabhakar, executive director at public sector lender Bank of India said, “We also lowered rates about three-four weeks ago. Deposit rates are unlikely to go up for the next two months at least, because the liquidity situation is still relatively easy and we are not seeing any further tightening by RBI on the policy front.”

He added, although the banks have started raising lending rates for short tenures.

According to Ashish Parthasarthy, treasurer at HDFC Bank, “As of now, deposit and lending rates are likely to remain stable. There could be a slight increase in ultra short-term lending and deposit rates, but medium- and long-term rates are unlikely to increase for the next two months, at least”.

How to match the interest earned on fixed deposit with the tax deducted by the bank?

Fixed deposits (FD) is the most convenient and simple instrument of investment. In this you can know about the earnings at the time of making deposit but the difficult part is to match the amount of interest earned on these deposits with the amount received and the tax deducted at source.

Let us take a case study to understand this point.

For instance Rajesh invests Rs 100,000, for one-year each in two FDs, in the financial year 2009-10. One investment he did in the beginning of the 2009 and will mature in March 2010 at the rate of interest of 7%. The second investment he did in July 1, 2009 at 7.2 per cent. Both the FDs will give simple interest cumulated at maturity, though for accounting purposes the amount accrues to the investment at the end of each quarter. In case Rajesh considers the interest earned when it is received, how will he account for the second deposit? How to match the interest earned with the tax deducted by the bank?

How to tackle this issue

First, what is the method of recognizing the income or interest earned? One is the accrual method in this the amount accrued on the deposit during the year is considered as income, even if not received. The other is the income when actually received, the cash way of accounting.

Generally an investor will find the former method convenient, especially when the income with a bank is crossing Rs 10,000 in the year. Therefore, Tax Deduction at Source (TDS), will be done, it will be in tune with the route adopted by the bank.

Here, the bank will consider the income earned by the depositor till the end of financial year and then deducts the tax on it.

The tax authorities have said banks should deduct TDS only on the amount credited and not on the provisions made. Thus, Rajesh must know when bank is crediting income to his account, in this case, quarterly, and this is the figure to be taken for accounting purposes.

In this case the income will be credited with the maturity, for the deposit that is maturing in March 2010. Thus, the interest earned will be Rs 7,000 for the year. The interest earned will be included in the investor's total income. Hence the income is actually received, so there is no complication.

The second deposit will also pay the amount at maturity. This deposit will mature in one-year time on July 1, 2010. As it is clearly stated that deposit amount will accrues at the end of every quarter, there is a need to consider the income earned till the end of March. The bank will follow the same procedure and they will use this for tax deduction. The income earned, here, will be Rs 5,400 till the end of March. Hence the investor should consider the income till March 2010, even though he may not have received the amount from the bank.

The tricky part is the alignment for taxation. The investor will get the net amount after TDS, as the amount of interest earned will be crossing the limit of Rs 10,000 during the year. Let us make it simple for understanding. Suppose the interest of rate is 10 per cent (without cess) for tax deduction. Thus, the amount received by Rajesh will be reduced by Rs 1,240 (10 per cent of 7,000 plus 5,400) for the TDS and the net amount received will be Rs 4,160.

To calculate the total income earned during the year, Rajesh cannot add the amounts received, as there is a TDS amount involved. He has to gross the total amount earned, which will be Rs 7,000 plus Rs 5,400 that is a total of Rs 12,400. This figure will be included in the income for the year under the head of income from other sources. Thus, the total amount of income and the tax payable on this income will be calculated. From this, the TDS amount has already been deducted by the bank, Rs 1,240, will be adjusted and the whole process is completed.

IOB hiked deposit rates, Central Bank reduces rates of loan for doctors, revise deposit rates

On Monday Indian Overseas Bank (IOB) has revised its deposits interest rate. The revised rates will be effective from March 15. As per revised rates for deposits of less than Rs 1 crore for tenure of 270 days and less than one year, the rate has been fixed at 6%, while for one year to less than five years at 6.75% and five years and above at 7.25%. And for a deposits of Rs 1 crore and above for a period of one year and above, the rate has been fixed at 6.5%.

Another bank Central Bank of India, a state-owned lender is offering loans to doctors at low interest rate. Bank has reduced interest rates on loans by 150 basis points for doctors for purchase of equipment and 100 basis points for construction of nursing home/ clinic/clinic cum residence (from 12% to 10.5 % for purchase of equipment and from 13 % to 11% construction of nursing home/ clinic/clinic cum residence.)

The bank has also announced wavier of the processing fee for its direct housing finance scheme, personal loan to corporate and non-corporate employees, Cent Jewel, teachers’ loan, Cent Vyapari, Cent Swabhiman plus until the end of the month.

The bank has also hiked its deposit rates on domestic term deposits from 25 basis points to 150 basis points on the deposits of Rs 15 lakh and above. The revised rates will be effective from Monday. The interest rate on domestic term deposits above Rs 15 lakh, but less than Rs 1 crore has been revised to 6.5% (6.25%) for the period one year to less than two years has been revised to 6.75% (6.5%) for two to less than three years and to 7% (6.5%) for three to less than five years.

Slowly banks are raising fixed deposit rates

In the coming months fixed deposit can again be a good investment option as the deposit rates are on their way up. But the things will get better in fiscal 2010-11.

Last week HDFC Bank had raised its deposit rates by 25-150 basis points (one basis point equals one-hundredth of 1%) across various terms. Earlier this month, IDBI Bank and ICICI Bank had raised the deposit rates by 25-50 basis points for some maturities, while J&K Bank had raised rates by 75 basis points on deposits above one year. The public sector Union Bank of India is proposed to raise deposit rates later this week. More banks are likely to follow the suit.

According to analysts the bigger banks will join the bandwagon to remain in competition. Ashish Gupta and Deepak Ramineedi, analysts at Credit Suisse, wrote in a report dated February 22, “With these rate actions, State Bank of India and ICICI Bank deposit rates are now at a 50-100 basis point discount (for some maturities) and they will now need to follow suit.”

But big bankers disagree with it. OP Bhatt, chairman, SBI, said in Delhi that his bank will not raise deposit rates before May-June as it has surplus liquidity (the amount of free money it had to give out as loans).

By the end of December 31, 2009, the bank liquidity was whopping over Rs 75,000 crore.

MD Mallya, chairman and managing director, Bank of Baroda said, “There is ample liquidity in the system. Hence, at the moment we are not looking at raising interest rates on deposits.”

But Gupta and Ramineedi of Credit Suisse said that “as loan growth (14.8% currently) accelerates and the central bank starts tightening money, this liquidity will also dry up soon.” In the recent past banks’ deposit growth rates have declined as much as four-year low of 17%. Therefore, banks raise lending rates then deposit rates have to rise.

Use FD overdraft to pay for big purchase deals

To make payment of big purchase deals go for overdraft facility rather than taking personal loan or swiping a credit card. In case of personal loan or credit card you have to pay high interest. Whereas in overdraft facility you can place a fixed deposit with a bank and avail this facility.

When you place your fixed deposit with bank you earn return on investment and can use the same money to leverage funds at a low interest rate which can be used for the payment of purchases.

Moreover in overdraft facility you can borrow funds at 1 per cent to 2 per cent above the fixed deposit rates. Currently, the deposit rates of most of the banks range from 6 per cent to 7.50 per cent for a one to three years time period. However, SBI is offering 6 per cent, ICICI Bank 6.25 per cent and HDFC Bank is offering 6.50 per cent interest on fixed deposits for a one-year period.

If the payment is done through credit card, it is split into equated monthly installments for over a period of one year, which means you might have to pay an interest of 36 per cent to 45 per cent per annum. Whereas personal loan is an unsecured loan, the interest rate can range from 16 to 18 per cent.

According to an official of Oriental Bank of Commerce, “It is always better to take an overdraft facility against a fixed deposit than pay through a credit card for long-term repayments’ because it will carry a minimum interest rate, even lower than personal loans”.

An official of United Bank of India said, “During the time when interest rates were very high, many customers who had placed their long-term fixed deposits managed at a very low rate to take the advantage by financing their purchase of cars.”

According to Financial planner Kartik Javeri, “During an emergency, it (overdraft) is the best source for financing, but one should also have the capability to pay money quickly.”

IDBI Bank raised deposit rates, introduced new slab of 500 days

IDBI Bank has increased its deposit rates by 25 basis points (bps) and has also added a new slab of 500 days offering 7 per cent rate.

Before IDBI bank, Union Bank of India, ICICI Bank and Jammu & Kashmir Bank (J&K Bank), have raised their deposit rates. But Union Bank and ICICI bank had raised deposit rates for only one slab, whereas IDBI has raised rates across five slabs.

Last week, J&K Bank had raised deposit rates by up to 75 bps for slabs of one year or more. IDBI Bank said its new updated rates on term deposits will be applicable from February 15.

A senior executive of IDBI Bank said, “This is the right time to raise funds albeit at slightly higher rates, especially in the 500-day bucket, as the liquidity in the system is high. This will help reduce pressure of competition next year, as these deposits would mature in July-August 2011.”

RATE CARD

* In early January, Union Bank introduced new maturity bucket of 555 days offering 6.75 per cent
* Effective January 8, ICICI Bank raised the interest rate on deposits of 270 days to less than one-year maturity by 25 basis points to 5.75 per cent
* On January 29, RBI announced a two-stage hike in CRR by 75-basis points to 5.75 per cent
* Effective February 8, J&K Bank raised rates by 75 basis points for maturity buckets of over 1 year

He added, “The bank’s dependence on market borrowings has been high. Now, we want to grow the base of a stable source of funds over the next three-four years”. The maximum rate being offered by bank is 7.50 per cent on deposits with tenure of 1,100 days, while the on the new slab of 500 days it is offering 7 per cent a year.

A banker pointed out banks are trying to acquire deposits in select maturities, in order to steal a march over the competition before they start raising interest rates as a whole.

Bank has raised deposit rates after the hike of 75-bps rise in the cash reserve ratio, or the proportion of deposits that bank set aside. The CRR is expected to suck out Rs 36,000 crore from the system.

During the second fortnight of January the deposit flow was healthy the banks getting nearly Rs 53,000 crore and the growth during the year till January 29 was 17.09 per cent, marginally low from the Reserve Bank of India’s (RBI’s) projected 18% for the year.

At present other players don’t seem to raise rates, due to low demand for funds. Banks like State Bank of India currently are not planning to do any increase, as it has around Rs 75,000 crore of cash.

Indian Overseas Bank Chairman & Managing Director SA Bhat informed, “There is enough liquidity in the system. Since we are not in a position to raise lending rates due to extreme competition and year-end pressure, I do not propose to increase deposit rates unless the asset-liability committee thinks otherwise.”

All about flexi bank account

On the banks website under deposit schemes you must have come across flexi bank account or must have heard some where, but what exactly flexi bank account is?

Banks have introduced a new banking account- flexi bank account under this they offer higher interest of a fixed deposit and the liquidity of a savings account. Under flexi account you can set your cash limits on the basis of your regular cash requirements and transfer the remaining amount to your term deposit and earn higher interest. During the opening of this account in the form once you have set the rules, the bank will do it automatically.

For instance, you have opened a flexi account of Rs 100,000 for a year, thus your flexi deposit of Rs 70,000, transferred to fixed deposit will earn 5% interest or Rs 3500 every year. The remaining amount of Rs 30,000 will remain in your savings account which you can use to meet your everyday needs as well as earn 3.5 per cent interest or Rs 1,050.

In case you issue a cheque of Rs 35,000 the excess amount of Rs 5,000 it would be transferred into your savings account from your flexi deposits with no extra charge on it depending on your bank terms.

Although some of the banks have different types of flexi bank accounts each having its own rules about the same. Generally there are two types – flexi fixed deposit account and sweep account.

Flexi FD

With flexi FD you can withdraw funds whenever you require. You can open a fixed deposit account ranging between Rs 25,000 to Rs 50,000 for a specific term depending on your bank. Some banks give option of zero balance savings accounts for a higher FD amount.

In case you require more cash than what you have in your savings account then you get the benefit of flexi FD. In such situation your bank will withdraw the excess required amount from your flexi FD and deposit it in your savings account. If you have more than one FD then the bank works on ‘First In, First Out' or FIFO basis thus breaking the first FD opened.

Every bank has their own rules regarding flexi FD schemes. For instance if you have opened a flexi FD account with IDBI Bank or ABN AMRO these banks will split FD into units of Rs 1,000. In case, you want to withdraw Rs 16,200 these banks will transfer Rs 17,000 from your flexi FD into your savings account.

Whereas the HDFC bank splits FD into units of Re 1 thus transfer only the exact amount you need and the rest will remain balance in your flexi FD to continue to earn interest as per the bank’s rate.

Sweep account

Sweep account also known as savings plus account is the reversal of a flexi FD. You should open a savings account in which you fix a minimum limit and the balance that exceeds this limit will automatically be transferred into your FD.

In ICICI bank sweep account you have to maintain a minimum balance of Rs 10,000 in your saving account and the excess amount will be transferred to your FD in multiples of Rs 5,000. While in State Bank of India in sweep account with a minimum of Rs. 10,000 a new FD is created whenever there is a transfer of money over and above Rs 10,000. in Canara Bank the minimum limit in sweep facility is of Rs 15,000.

Advantages and disadvantages of these accounts

In flexi FD account you can enjoy benefits of both savings as well as fixed deposit i.e. higher interest of fixed deposit and liquidity of savings account.

But it also has a drawback. You can enjoy the benefits for only a short term, because the tenure of these accounts is of one year only as its main aim is to give you liquidity and higher interest.

Most of the banks charge the penalty, if customers do not maintain minimum limit in their savings account. There is also a pre-closure charge in case customer closes these accounts before the tenure.

In flexi FD reverse sweep facility is not allowed that is the funds from your savings account cannot be transferred into your flexi FD. In sweep account reverse sweep is allowed.

Also there is a set limit for overdraft and you can keep money in your account for a minimum number of months only. Therefore, investing in these accounts means you invest your money in one place and there is no diversification of your portfolio.

Which account is better?

If you want that to earn higher interest on your money in savings account then flexi scheme might be helpful. However, when you opt to open any of these accounts you must carefully analyze your financial requirements to set the minimum limit as you can be penalized for falling below the predetermined levels or pre-closing of accounts. The decline in interest rates of fixed deposits should also be taken into consideration while opening an account.

Best investment option for senior citizen to earn regular income

Whether a person is employed or approaching the retirement age, everyone searches for investment avenues which are safe and can offer regular income. Although one can find various schemes of investment but security of money is most important factor.

In 2004 Government of India introduced one such special scheme known as Senior Citizen Savings Scheme or SCSS to cater the financial needs of senior citizens.

However the scheme had become very popular amongst the people, but last year when banks offered high rates on fixed deposits had overshadowed the scheme. But in the past few months the banks are reducing deposit rates due to which senior citizen can go for this scheme.

The only shortfall of the scheme is the interest earned on it is taxable. In case the interest income in a year exceeds Rs 10,000, then the TDS (tax deducted at source) is cut.

Although in the recent amendment the investment of up to Rs 1,00,000 in a year done under this scheme has been exempted under Section 80C of the Income Tax Act.

Here the advantages and disadvantages of the scheme have been discussed to help the senior citizens to compare it with other options available.

Senior citizen, a person who has completed 60 years or above is eligible for the SCSS but there is a provision that a person who has completed 55 years and opted for voluntary or any special retirement scheme, can avail this scheme subject to certain conditions.

The scheme is basically for senior citizens therefore it has some special features.

1. The scheme offers a fixed rate of return at 9% per annum, which is higher than the returns offered on other fixed income instruments like PPF and NSC.
2. The investor gets interest income quarterly. Generally, it is the last working day of every quarter. There is no option of getting interest income yearly or cumulative interest at the time of maturity.
3. The tenure of the scheme is 5 years, but premature withdrawal after a year is permissible which gives the benefit of better liquidity to meet unforeseen expenses. Premature withdrawal involves some cost. In case the deposit account is closed after the first yea, but before the second year, 1.5% of the principal amount is deducted otherwise 1% of the principal amount is charged once the scheme completes two years.
4. One gets the option of extending the scheme for another three years on maturity at the prevailing interest rate at that time.
5. The minimum amount of investment is Rs 1,000 while the maximum investment can be Rs 15 lakh. The investment has to be made in multiples of Rs 1000.
6. One also gets the option of opening more than one account, but the new account can be opened after a one month gap. The account can be opened in an individual’s name or can be opened jointly with spouse. Joint account with any other family member or relative is not allowed. Although one can open more than one account but there is the cumulative investment limit has been set to Rs 15 lakh.

There is one perception among the people that it can be opened only with post office but it is not so. Few of the designated branches of nationalized banks and the ICICI bank are authorized to receive deposits under the scheme.

Looking at the above points the scheme looks fruitful but is it really worth investing in this scheme. To get the answer we need to compare this scheme with other investment avenues having similar features.

A bank fixed deposit features are some what same. At present banks are offering interest rates in the range of 7-7.5%. But the nationalized banks and some of the private banks offer additional interest benefit to senior citizens in the form of 25-50 basis points higher. Therefore the interest rate offered on fixed deposit can range of 7.25-8%, but this is less than 9% offered on SCSS. Thus the SCSS is a bit more profitable than bank fixed deposits.

Let us compare SCSS with MIS (Monthly Income Scheme) offered by post offices in India, having same features. Under MIS the fixed rate of return is 8%.

The interest in MIS is paid monthly and the tenure is six years. In this comparison we consider the returns under SCSS over six years.

For instance Mr A deposits Rs 1,00,000 under SCSS, while Mr B invests Rs 1,00,000 with the post office under MIS.

Mr A will receive Rs 2,250 every quarter till the end of the sixth year and the principal amount will be Rs 1,00,000 which he will get back on maturity. Thus the total interest payout over 6 years will be around Rs 54,000.

While Mr B will get around Rs 660 every month, which comes to Rs 2,000 every quarter till the end of sixth year, which stands to be Rs 250 less than the quarterly receipts under SCSS. But under MIS a bonus of 5% on principal amount is paid at the time of maturity. Therefore Mr B will be receiving Rs 1,00,000 along with Rs 5,000 as bonus at the end of sixth year.

Thus the total profit Mr B earns over six years amounts to Rs 53,000. However in terms of total profit earned under MIS or under SCSS over the tenure, there is not much difference. But in case once money requirement increases periodically then the SCSS is a better option as the investor gets more money in the hand every quarter.

Looking at the above points and comparison one reaches to a conclusion that senior citizens must invest a portion of their retirement corpus in the Senior Citizen Savings Scheme as they will get everything – safety, liquidity and regular periodic income under this scheme.

Banks report surge in Casa ratio as against fixed deposits

In the past few months term deposit rates have lost sheen as banks have reduced rates. Now people prefer to park their money in current account savings accounts (Casa) rather than investing their money in fixed deposits for longer duration. Banks have reported a significant rise in their current account savings accounts (Casa) ratio for the quarter ended December 31, 2009.

State Bank of India (SBI), country’s largest commercial bank is the major one to witness surge in the ratio of its Casa. Bank’s Casa surged to 42.94 per cent as on December 31, 2009, against 36.58 per cent in the corresponding period a year ago, thereby registering a growth of 29.94 per cent. Earlier in the same period SBI overall deposits growth stood at 11.26%.

When bank Casa ratio increases its cost of funds comes down. On the other hand HDFC Bank Casa ratio surged close to 49 per cent as on December 31, 2009, as against 40 per cent as on December 31, 2008. And, as of December 31, 2009 the savings account deposit of HDFC Bank stood at Rs 46,696 crore, registering a growth of 41.2 per cent over December 31, 2008, whereas current account deposits amounted to Rs.33,276 crore as of December 31, 2009, a growth of 37.2 per cent over December 31, 2008.

Ashish Parthasarthy, head of treasury, HDFC Bank, said, “We traditionally have the highest Casa ratio in the industry. Since, the difference in interest rates offered on term deposits and savings are not significant, many people prefer to keep their balance either in current or savings accounts, which is resulting in higher Casa.”

A similar trend was also reported from ICICI Bank, the largest private sector bank in the country. ICICI Bank Casa ratio registered at 39.6 per cent at the end of third quarter of the present financial year as against 27.4 per cent on December 31, 2008 and 36.9 per cent on September 30, 2009.

Regarding savings deposits ICICI Bank reported an increase of Rs 1,736 crore and in case of current deposits it was Rs 3, 581 crore, during the quarter ended December 31, 2009. Besides major players improvement in Casa ratio was also reported from mid-size and smaller banks such as Yes Bank and IndusInd Bank. Improvement in low-cost deposits was also reported from these two banks.

Yes Bank Casa ratio increased to 10.1 per cent at the end of December 2009 from 9 per cent at the end of December 2008.

Rana Kapoor, founder Yes Bank told Financial Chronicle, “Though, our Casa is at 10.1 per cent, the share current deposit is much higher at 80 per cent, which effectively means that 15 per cent of our total deposits are low-cost deposits.”

High inflation can reduced your fixed deposit close to zero

Last year all the banks reduced their fixed deposit rates for almost every period. Currently, according to official inflation figure is above 7 per cent which is a bad news. The prices of almost everything are very high. So the returns from fixed deposits might amount to nothing if the current rate levels continued as all the interest earned will be absorbed by price rises.

According to experts investors, who invested in FDs for security of capital, should think more than safety and add should take some risk to earn real returns.

Currently interest rates being offered by leading banks ranges between 6 per cent and 6.5 per cent on one-year deposits and on Thursday the inflation have touched 7.31 per cent. The retail prices are managed by consumer price index is currently around 12 percent and food inflation is just short of 20 per cent.

Sundeep Sikka, chief executive officer, Reliance Mutual Fund stated, “In the current scenario it is an eye opener as money lying in bank fixed deposits is actually money eroding.”

Although banks are offering 6 per cent interest on a one-year deposit but the return earned gets reduced to below 5 per cent in case it comes in income tax range.

Also, in such case the real rate of return, which is equal to nominal rate less the inflation, turns negative. On the other hand, the BSE’s benchmark stock index, the Sensex has earned a compounded annual return of 23 per cent over five years regardless of serious lows.

“In such a case it (FD) is not even covering one against the rising cost of living,” said Surya Bhatia, a Delhi based financial planner. “Investors should look at instruments that can at least cover them against inflation and start taking a little risk.”

Fixed deposits come with more benefits

Fixed deposits (FDs) a traditional investment option has been a vital part of every investor’s portfolio, due to assured rate of return. However FDs have been plain vanilla products with no additional benefits attached to it. Now banks, in an era of competition are offering few packaged deals in order to attract more investors. Few of the interesting deals being offered are:

Insurance: Some banks are offering insurance with FDs but the main product will be the same along with additional benefit. But the insurance will be based on the deposit amount and the tenure.

For instance, one of the bank is offering free accident insurance cover worth Rs 5 lakh on a 3-year deposit of Rs 25,000 carrying an annual interest of 8 per cent. This adds the value to the product.

Most of the banks offer accident insurance only. The insurance amount ranges from, Rs 3 lakh and 7 lakh. But the accident cover will have a lot of clauses. Therefore, your overall insurance needs should not depend on such bundled policies.

Floating rate deposit and reinvestment of interest: Mostly FDs are offered at fixed rates for the specific tenure. But some of the banks and non-banking finance companies (NBFCs) offer deposit schemes at floating rate of interest. For instance, HDFC offers floating rate deposit on which the interest rate is given every quarter.

Then some banks have facility of reinvestment of interest amount at the existing rates. For instance you get Rs 2,000 interest every quarter on your deposit, so the bank will make a new FD with this amount at the existing rates.

No penalty: FDs are made for a fixed tenure. In case depositor withdraws before the maturity, the institution charges a penalty. In such a case, the overall return will come down. For instance a FD was made for three years at the rate of 8 per cent and is withdrawn after one year, the rate available could come down to as low as 5 percent.

Some of the banks have products where the rate of interest is not reduced if FD is broken before the tenure. The investors who look for flexibility, such deposits are beneficial for them.

Time period flexibility: Some of us make FD for a particular purpose such as for purchasing an expensive item on child’s marriage. There can be chances that these plans are postponed and the depositor does not require to extend the tenure of his/her investment. In such a case one option is to let the deposit mature and then reinvest it. But there is no surety that you will get the same interest rate in the future or it will be reduced. Therefore some of the banks have started providing FDs where investor is allowed to increase the time period of investment without major changes in other conditions.

Adding and breaking deposits: A large amount of paperwork is involved in case a person makes multiple FDs of smaller denominations. Usually investors who might need money at various stages in future do such investment, so they do not deposit in bulk and then break the deposit.

To solve this problem banks have introduced products where a bulk deposit is divided into deposits of smaller denominations as per investor’s need.

On such deposits investor earn higher benefits. Also, banks offer facility to add investments easily so that administration does not become a very difficult task.