As banks continue to raise their rates on interest offered on fixed deposits, interest rates have swelled up like never before. Senior citizens are benefiting the most as they are the ones on the highest peak of the receiving end. In such a scenario, while it may seem quite alluring to get rid of your fixed deposit by withdrawing it and depositing it in a bank that offers a comparatively higher rate of interest, you must opt out of it as in the long run, such a decision might not serve to be profitable. If your fixed deposit is nearing its period of maturity, then it would not make any sense to break it now as you would only lose some of your interest income. It is better to finish the tenure to avoid losing out on interest due to premature withdrawal of funds, especially since such a decision would dampen your gains that you have earned from higher deposit rates. The bank can also impose a penalty on the premature withdrawal of funds. While such penalties can tower as high as up to 1%, it will definitely hamper your prospects of profitability in the long run. Banks essentially levy penalties and fines at such times, as with a rise in interest rates at a seemingly fast pace, people rush to exit from their fixed deposits leading to increased pressure on the banks. Although customers are free to reinvest their funds in the fixed deposits of the bank, the bank does not hold back that all such information will be subject to its discretion.
While banks justify the levying of fines as a “customer-friendly” measure, especially since people seek to reinvest when there is a hike in rates if interest, termination or closure of a fixed deposit may lead to a mismatch in the asset-liability records of the bank. The purpose of imposing penalties is definitely paying off as claimed by banks, as people who had initially invested for a shorter period of time and had begun to break their current fixed deposits, were now seen shifting their loyalties to long-term fixed deposits due to distinct gleam of attractive rates of interest. Last year, the Reserve Bank of India had requested all banks to enable the conversion of their recurring, fixed or daily deposits for the purpose of reinvestment, without reducing the rates of interest in the form of a penalty. However, the Reserve Bank of India was quick to reverse its stance soon, claiming that banks were free to impose their own charges as per their free will, incase people undertake conversion of their deposits with the purpose of acquiring higher rates of interest. Remember it is never too late to invest in FDs. If the interest rates are slightly down now, it will bounce back soon. But consider it to be a much better opportunity than opting for home loans, car loan etc where you might have to much more than the actual cost price of the product.
While this has enabled banks to reconsider their thoughts on pulling out money, customers get the opportunity to calculate and rethink on their decision to walk out of the fixed deposit in a premature manner, especially since banks do not inform customers of any such penalties in an upfront manner. It is beneficial to prematurely withdraw funds from your fixed deposit only if there has been a high and quick increase in the rates if interest over a short period of time. In case there is a financial contingency as a result of which you need to break your fixed deposit, then the high rates of interest on the deposit may compensate for the penalty imposed on premature withdrawal. However, if this is not the case, then do not opt for premature withdrawal as an option. Sometimes, banks can be flexible by waiving off penalties if there is an unavoidable circumstance of contingency like a sudden illness, death and so on. However, since there is no applied rule on the same, then it is up to the bank’s discretion to decide the same and the customer must not leave any stone unturned in convincing the problem due to the genuine nature of his problem.