Maharashtra state-run banks start charging for retail FD foreclosures

As interest rates on deposits take a downward spiral, public sector banks are following their private sector peers to charge foreclosure penalty on retail fixed deposits. The decision stems from their fear that customers may migrate to other modes of savings as FDs turn less attractive with lower rates.

State Bank of India, Bank of Baroda and Indian Overseas Bank (IOB), among others, have introduced foreclosure penalties that result in deduction of 0.50% to 1% of the interest rate on fixed deposits.

Private banks such as HDFC Bank and ICICI Bank have been charging foreclosure penalties, while the PSU banks were offering penalty waivers to attract depositors and mobilise resources.

Banks also used to have specialised schemes where the depositors were not penalised for closing their deposits and in fact, were paid interest up to the date on which the FD remains with the bank, irrespective of whether it was due for maturity or not. Some banks such as Corporation Bank and Union Bank of India, however, continue to have no penalty on foreclosure.

Most banks have revised downwards their deposit rates by 25 basis point with the average interest rate of a one-year term deposit quoting around 7.5%. Earlier, banks had various schemes under which the foreclosure penalty was waived.

An IOB official said, "The foreclosure penalties at IOB are applicable from January 7."

While SBI does not charge any foreclosure levy for deposits of Rs 15 lakhs and above if the deposit has remained with the bank for at least 7 days. For deposits below Rs 15 lakhs, the bank charges a penalty 0.50% per annum and no interest rate will be paid. A senior SBI official said the bank had special schemes where no penalties were charged on foreclosure but those schemes have wound up.

ICICI Bank did not have any specific scheme for interest waivers. In case of the fixed deposit being prematurely closed for the purpose of reinvestment into another scheme of fixed deposit, the existing deposit would be subject to a penal rate of interest. And if the fixed deposit is closed before completing the original term of such deposit, interest will be paid at the rate applicable on the date of deposit for the period for which the deposit has remained with the bank. The deposit may be subject to penal rate of interest as prescribed by the bank on the date of deposit.

While HDFC Bank charges a penalty of 1% on the applicable rate of interest for premature withdrawals, including sweep-ins and partial withdrawals. However, the foreclosure penalty is waived for fixed deposits booked for a tenor of 7 to 14 days with the bank.