Banks are seeing a trend of higher demand for loans or overdraft against fixed deposits (OD against FD) product, senior bankers have told FE.
OD against FD is one of the quickest and cost-effective ways to borrow money from a bank without any premature withdrawal of FD. In this product, a customer FD is used as collateral for OD facility. Typically, banks allows OD up to 90% of the existing FD value, and interest levied on the facility is maximum 2% above the contractual FD interest rate. Another advantage of taking an OD against FD is that customer is charged OD interest only on the amount utilised and not against the entire principle amount sanctioned.
Further, customer do not need to worry about EMI obligations as they have the flexibility to deposit the outstanding amount at their convenience, bankers say, adding that there are no processing charges to avail the OD facility.
“At RBL Bank we have seen a 43% rise on the ODFD product. In the current environment of high FD rates, ODFD is the quickest and a cost-effective way to borrow money from the Bank without premature withdrawal of FDs,” says Deepak Gaddhyan, head of branch & business banking at RBL Bank. He, however, did not share the exact quantum of OD against FD loans disbursed till date by the bank.
RBL Bank offers competitive FD rates and an opportunity to customers to meet their short-term liquidity crunch without having to lose out on their earnings, he said. Currently, RBL Bank’s offers FD rates in the range of 4-8.30% across various tenures, according to bank’s website.
While most large private and state-owned banks do not provide the exact quantum of OD against FD due to lower outstanding amount, according to Reserve Bank of India’s (RBI) latest sectoral credit deployment data, bank’s advances against deposits rose 46% year-on-year (y-o-y) to Rs 1.20 trillion as of June end. Loans against FD had grown 11% during the corresponding period last fiscal, the data showed.
State-owned lender Punjab National Bank has disbursed Rs 1,494 crore of OD against FD loans, pre-approved business loans and pre-approved personal loans during Q1FY24, according to its Q1 investor presentation. In FY23, the bank had sanctioned Rs 4,007 crore of such loans.
Meanwhile, AU Small Finance Bank’s (SFB) other loans which include ODs against FD, term loan and gold loans grew 46% y-o-y to Rs 2,563 crore as of June end. Ujjivan SFB’s other loans which include OD against FD, personal loan, vehicle loan and staff loan grew over 3-folds y-o-y to Rs 416 crore as of June end.
“We are seeing growth in OD against FD …A lot of people have moved savings into term deposits as interest rates look good…so some of them may need short term liquidity so they are taking OD against those FDs,” Ittira Davis, MD & CEO at Ujjivan SFB told FE.