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.