IDBI Bank launches floating rate interest fixed deposit

IDBI Bank has launched floating rate interest retail term deposit (FRITD). The scheme is similar to any other bank fixed deposit but the rate of interest moves in tandem with a reference rate, which is periodically reset. The interest rate in the case of FRITD is anchored to a transparent, market-based rupee benchmark rate - average yield at 364-Days Treasury Bills Auctions undertaken by RBI during the preceding three months. The interest would be reset every calendar quarter.

The minimum amount of deposit would be Rs. 10,000/- and thereafter in multiples of Rs. 1000/- with a cap of Rs.1 crore, coinciding with the definitional threshold of a retail deposit. The FRITD would have a lock-in period of one year and would be accepted in six maturity slabs, ranging from one year to ten years. Customers can switch from fixed to floating interest rate term deposits by closing the former at the originally contracted rate, without any premature penalty, subject to certain conditions. However, no conversion of floating to fixed rate is permissible. As in the case of fixed rate Deposits, one can avail a loan/overdraft against the FRITD also.

The product is likely to appeal to the retail investors who borrow at floating rates (say, for home loans) but invest at a fixed rate, and are consequently exposed to high interest rate risk. FRITDs ensure that their loans and deposits move in tandem and would help to partially immunize their asset-liability portfolio from such risks. Investment in FRITDs is also beneficial when the interest rates are expected to rise as it enables the investors to take advantage of periodic increase in the market rates. In a rising interest rate scenario, the customers generally go in for short term deposits and keep rebooking them as and when interest rates move up. FRTD would help do away with this cumbersome process.