Now, depositors can opt for floating rate on deposits

Now, depositors can opt for floating rate on deposits

State Bank of India (SBI) said it will launch a fixed-floating product whose interest rate is linked to the base rate. The product will be available from September 6.

The Reserve Bank of India had allowed banks to float such products in 2002. Many lenders had introduced term deposits with flexible interest rates but did not get enthusiastic response from the market.

The interest rate would change in tandem with the base rate, as and when a revision in the benchmark rate takes place.

For a one-year floating-fixed deposit of SBI, the interest rate will be 50 basis points lower than the existing base rate, which is currently 7.5 per cent. In comparison, the return on existing fixed deposits with a tenor of 1 year to 554 days stands at 6.75 per cent, while a 555-day fixed deposit earns an interest rate of 7.25 per cent.

In the case of a three-year floating term deposit, the interest rate will be 25 basis points lower than the base rate, while for a five-year floating term deposit, the interest rate will be at par with the base rate.

The floating rate term deposit product, however, will offer no guarantee on returns, as the interest will change with the revision of base rates.

Other banks are likely to follow SBI in offering similar products offering floating rates for fixed deposits.

Asked if Bank of India will also launch a similar product, its Director M Narendra, said, "We will look at it at appropriate time."

If one wants flexibility in returns, then one can go in for the floating option, Central Bank of India Executive Director Arun Kaul said.

"Whether the product is beneficial for the customer, it is very difficult to say, as the rate would change with the revision in the benchmark, which is the base rate in this case," he added.

In case the base rate is revised upwards, depositors are benefited, but in case of a downward revision, they stand to lose vis-a-vis a fixed rate product, he said.

A senior official of another state-owned bank said, "It is a complicated product. The customer has to be aware which way interest rate is going to go in the future and accordingly he has to take an informed decision, otherwise he may end up getting lesser returns than fixed rate products.

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