LOANS AGAINST FDs MAY LOSE SHEEN

Loans against fixed deposits (FDs) may lose their sheen once banks shift to the proposed Base Rate scheme for all fresh loans sanctioned by them with effect from April. Once the new scheme kicks in, banks will have to determine their actual lending rates on loans and advances with reference to the Base Rate.


Currently, commercial banks give loans against FDs at one per cent over the FD rate that is, if a depositor parks his/her money in a two-year FD (at 6.5 per cent interest) with a bank, then he/she can get up to 90 per cent of the deposit amount as loan at 7.5 per cent.


Going by the regulator's draft circular that will take effect from April 1, fresh loans cannot be given below the Base Rate, which bankers say could range from 8to 9.5 per cent, the rates on loans against FDs could edge up.


Besides loans against FDs, the RBI circular is not clear on loans given by banks to their staff. The RBI circular is silent on whether such loans will also have to be moved to the Base Rate regime.


Source: http://www.thehindubusinessline.com/2010/02/19/stories/2010021952500100.htm