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Loans against FDs gain traction

August 10, 2023

Loans against FDs gain traction
Bank depositors don’t seem to be wanting to break their fixed deposits (FDs) to meet their emergency funding requirement, as these deposits are currently fetching high returns. Instead, they are more inclined to take loans against FDs.

This is evidenced by Reserve Bank of India data, which shows that banks recorded a robust 46 per cent year-on-year growth in “advances against FDs” as of June 30 against the July 1, 2022, outstanding. As of June 30, 2023, their portfolio stood at ₹1,20,427 crore.
 
As of July 1, 2022, advances against the FDs portfolio grew by 11.2 per cent (compared to the July 2, 2021 outstanding), with the outstanding being ₹82,252 crore as of this date.
 
Experts say instead of breaking a FD, which could entail premature withdrawal penalty charges of up to 1 per cent, customers prefer taking a loan against it.
 
In the process, even as customers continue to earn income on the FD, they avail loans against it, with the outgo on this account being only 1-2 per cent higher than the interest earned on the deposit. Usually, they take such loans for a short period.
 
For instance, if a State Bank of India customer takes a loan against a 400-day FD, which currently earns the highest interest rate of 7.10 per cent among all maturity buckets, the interest outgo will be 8.10 per cent (one per cent above the relevant time period FD rate). The Bank gives up to 95 per cent of the FD as a loan.
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