Banks to impose penalty on premature closure of FDs

In a bid to discourage premature withdrawal of money from fixed deposit accounts, banks have decided to impose a penalty on such transactions to minimise any impact on their liquidity position at a time when rising interest rates are pushing up the cost of funds for them.

RBI has left it to banks to decide whether they want to impose any penalty on premature closure of fixed deposits.

As such, the customers are given a return lower than the promised interest rate in case of early withdrawals.

Although some of the public sector banks have already in place a mechanism to impose a penalty on pre-mature withdrawal of money from FDs, a number of others, mostly private sector banks, have not been charging any such penalty in their attempts to lure more customers.

However, the continuous rise in interest rates over recent months have pushed the cost of funds much higher for the banks and premature withdrawal from deposit accounts has put unnecessary pressure on the banks' liquidity position, a senior private sector banker said.

Earlier, the banks used to give only the interest rate applicable to the period for which the deposits have been maintained in case of premature withdrawals and not the full return promised at the time of booking the FDs.

In such a scenario, some of the banks, including the country's second largest private sector bank HDFC Bank, have decided to impose a penalty of one per cent for all premature withdrawals from fixed deposits.

With effect from January 24, HDFC Bank has decided to impose one per cent penalty on premature closures, including for partial withdrawals, it said in a customer circular.

On the other hand, some others such as IDBI Bank will spare new deposits from the penalty clause to lure more customers, but would impose a fine in case of older deposits.
On its part, IDBI Bank has said it would not charge any penalty for premature withdrawal on its various term deposits opened/renewed with effect from January 1.

However, in case the customer wants to prematurely withdraw the FDs booked before January 1, 2011, a penalty of one per cent would be imposed, IDBI Bank said.
"Interest payable on prematurely withdrawn deposits will be the contracted rate or the rate applicable for which the deposit remained with the Bank, whichever is lower, less 1 per cent penalty," IDBI Bank said.

Some others, including Indian Overseas Bank, do not impose any penalty on premature withdrawals of FDs up to Rs five lakh, but charge 1 per cent penalty for higher deposits.
Karnataka Bank and Dhanlaxmi Bank are also charging one per cent penalty on early withdrawals.