Unclaimed term deposits will no longer attract higher savings deposit rate

If you are an investor of term deposit (TD) in a bank and not keeping a track of the maturity for years, you may be at a loss. The higher interest rates offered by some private banks and small finance banks have forced the Reserve Bank of India (RBI) to tweak the norms for payment of interest on the amount left unclaimed with the bank after the deposit is matured.

According to a circular dated July 2, 2021, if a term deposit matures and proceeds are unpaid, the amount left unclaimed with the bank will attract a rate of interest as applicable to savings account or the contracted rate of interest on the matured TD, whichever is lower.

Earlier, if a term deposit matured and the proceeds are unpaid, the amount left unclaimed with the bank attracted the rate of interest as applicable to savings deposits.

What are term deposits?

Term deposits are interest-bearing deposits received by the bank for a fixed period. It also includes deposits such as recurring, cumulative, annuity, reinvestment deposits and cash certificates. They usually carry short-term maturities ranging from one month to a few years and will have varying levels of required minimum deposits.

The new norms are applicable for deposits in all commercial banks, small finance banks, and cooperative banks.

Bankers said unclaimed deposits are transferred to the central bank’s Depositor Education and Awareness (DEA) Fund, every month. A separate body established by the RBI allocates the funds transferred to the fund by various banks in government securities and thus pays interest on deposits by the income generated under the fund.

According to the rule, when a subscriber does not make any transaction in the account for at least 10 years, the deposit is classified as unclaimed by the RBI. Deposits in current and savings accounts, fixed deposits, and other bank deposits such as recurring deposits, annuity, cumulative, reinvestment deposits and such could be classified as unclaimed after the specified timeframe.

The move by the central bank to tweak the rule comes in the wake of an increase in savings bank account interest rates by some private banks and small finance banks.

Though in general, interest rates on savings accounts have hit a low, some small finance banks offer high interest rates on savings accounts, as high as 7.25%. Small private banks too offer a higher rate, much above the existing fixed-deposit (FD) rates, in order to attract customers.

What are banks offering now?

A close look at the interest rates on savings accounts in various banks in the country throws an interesting trend. Leading public sector and private banks offer one of the lowest rates, mostly in the range of 2.70-3% annually.

Some small finance banks offer high interest rates on savings accounts, as high as 7.25%, to raise CASA deposits. Similarly, small private banks also offer a higher rate.

State Bank of India (SBI), the largest lender in the country, currently offers 2.7% on savings account balance starting from since May 31, 2020. The rate is similar across different slabs. In April 2020, it had cut the rate on all its savings accounts to 2.75% from 3% earlier.

Among other public sector banks, Punjab National Bank offers 3% per annum. Since May 1, 2021, IDBI Bank offers 3-3.4% for different slabs of deposits, with deposits up to Rs 50 lakh attracting 3% and deposits above Rs 2 crore, 3.4%.

Some private banks offer slightly higher interest rates. While YES Bank offers 4-5.5%, IndusInd Bank savings accounts attract 4-6% annually. RBL Bank offers 4.75-6.5%.