HDFC TO CHARGE FOR EARLY FD WITHDRAWAL

If it was prepayment charges on home loans that plagued bank customers during falling interest rates, a spike in returns offered by term deposits has raised the issue of penalties on premature withdrawals.

HDFC Bank, which earlier allowed depositors to redeem deposits without a penalty , has said that it will change its rules from January 24. “As per the terms and conditions of fixed deposit accounts of the bank, the penalty on premature closure of FDs, including sweep-in and partial closures has been fixed by the bank at the rate of 1%. This will be applicable with effect from 24th January 2011,” said a notice issued by the bank. Incidentally, the RBI is expected to raise interest rates on January 25 when it announces its monetary policy for the third quarter. “The terms and conditions of opening an account state that the terms of the deposit can be changed anytime after providing a 30-day notice which we have done,” said an official with HDFC Bank. “The depositor does not stand to lose since he has the option to withdraw his deposits till January 24 without paying any premature penalty” he added.

Several public sector banks like State Bank of India have a premature withdrawal charge. A few like Axis Bank andIDBI Bank continue to maintain that they will not impose any penalty on premature withdrawals . “We do not have any penalty for premature withdrawals . However, in case of premature withdrawal, the depositor will not get the interest for the original period but for the period the deposit has actually run,” said Somnath Sengupta, executive director and CFO, Axis Bank. The bank expects its spreads to come under pressure as deposits may get re-priced with interest rates going up.

According to a RBI circular , a bank, on request from the depositor, should allow premature withdrawal of a term deposit. The bank will have the freedom to determine its own penal interest rate of premature withdrawal of term deposits. However, it should ensure that the depositors are made aware of the applicable penal rate along with the deposit rate. In other words, any penal rate on account of premature withdrawal of deposit would be notified by the bank at the time of opening such deposits.

At present, most public sector banks have a penalty for premature withdrawal of FDs. The penalty is usually a one percentage point deduction from the interest rate for the period, for which the deposit has already run. For instance, if a customer decides to invest Rs 1 lakh in a three-year fixed deposit and chooses to withdraw at the end of the first year, he will get the prevailing rates applicable on one-year deposits less one percentage point penalty towards premature withdrawal.

FINE PRINT

The penalty on premature closure of FDs has been fixed at therate of 1% This will be applicable with effect from next Monday Several public sector banks like State Bank of India have a premature withdrawal charge A few like Axis Bank and IDBI Bank continue to maintain that they will not impose any penalty on premature withdrawals.

SOURCE: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/hdfc-to-charge-for-early-fd-withdrawal/articleshow/7317064.cms