While being a safe avenue to park savings, fixed deposits (FDs) are also turning out to be a popular tool to borrow money. As interest rates jump to a three-year high, borrowers who would have taken a personal loan or an unsecured business loan now have started to borrow with fixed deposits (FDs) as collateral, reported The Economic Times.
Loans against FDs rose 43% during the last fiscal year, the highest rate in nearly a decade, data from the RBI showed. It has emerged as one of the fastest-growing retail loan products driving banks’ loan books, ET wrote.
What is loan against FD?
A loan against FD is a type of secured loan where customers can pledge their deposits as security and get a loan in return. The value of the loan depends on the FD amount and can go up to 90-95% of the deposit amount.
The outstanding portfolio of loans against FDs stood at ₹ 1. 13 lakh crore as of February, up from ₹ 79,349 crore a year ago.
Soumitra Sen, consumer banking and marketing at IndusInd Bank said FD rates are at their peak and clients are investing their surpluses in FD for the last two to three quarters.
The weighted average interest rates on outstanding deposits have gone up by over 100 basis points in the last year, the latest RBI data show.
The interest rate for an overdraft on fixed deposits is generally 100-150 basis points over and above the FD rate. The country’s largest lender State Bank of India for example charges 100 bps above the relative time deposit rate. This mean one can get money at 8-9 percent, which is far cheaper than a personal loan or a business loan.
Besides lower rates of interest, a number of banks offer attractive features such as flexible payback duration, ‘pay only when you use’, and accordingly charge interest. Sanctions are quick and most of the time application processing and disbursement are over the counter and at zero processing fees. Moreover, since the borrower does not break the deposit, there is no need to pay a penalty.
Banks too are comfortable lending against such deposits as they give exposure to a safe asset, which remains intact even as they grow their loan books.
Besides, it is easy to monitor such assets as these loans are linked to their savings or current accounts in addition to having low-risk weightage assets for the bank.