IDBI Bank launched a customer-friendly product in the form of Floating Rate Interest on Retail Term Deposit (FRTD). This is intended to help the customer leverage the upside of an increase in interest rates and also hedge floating rate borrowings. It is a variant of fixed deposits, wherein the rate of interest is not fixed for the entire tenor of the deposit, but moves in tandem with a reference rate, which is periodically reset.
The interest rate in case of FRTD is anchored to a transparent, market-based rupee benchmark rate viz. average yield at 364-Days Treasury Bills Auctions undertaken by RBI during the preceding three months. The interest would be reset every calendar quarter.
The minimum amount of deposit would be Rs. 10,000/- and thereafter in multiples of Rs. 1000/- with a cap of Rs.1 crore, coinciding with the definitional threshold of a Retail Deposit. The FRTD would have a lock-in period of one year and would be accepted in six maturity slabs, ranging from one year to ten years. Customers can switch from fixed to floating interest rate term deposits by closing the former at the originally contracted rate, without any premature penalty, subject to certain conditions. However, no conversion of floating to fixed rate is permissible. As in the case of fixed rate Deposits, one can avail a loan/overdraft against the FRTD also.
The term deposit product with a floating/flexible Rate of Interest is being offered as an additional facility to the Retail investors of the Bank, over and above the Fixed Term Deposits.
Announcing the novel product, Shri R.M. Malla, Chairman and Managing Director, IDBI Bank said, “With the phenomenal rise in financially literate strata of society, innovation & customer satisfaction have become the key differentiators. Our Bank’s FRTD would allow our valued customers to take advantage of interest rate changes without closing and rebooking their fixed deposit.”
The product is likely to appeal to the retail investors who borrow at floating rates (say, for home loans) but invest at a fixed rate, and are consequently exposed to high interest rate risk. FRTDs ensure that their loans and deposits move in tandem and would help to partially immunize their asset-liability portfolio from such risks. Investment in FRTDs is also beneficial when the interest rates are expected to rise as it enables the investors to take advantage of periodic increase in the market rates. In a rising interest rate scenario, the customers generally go in for short term deposits and keep rebooking them as and when interest rates move up. FRTD would help do away with this cumbersome process.