FDs come to the rescue of those seeking loans

With the interest rate upcycle setting in last year, fixed deposits have continuously hit the headlines for offering higher interest rates to the common man, who are now waking up to another use altogether – as collateral to raise loans. The Economic Times has reported that many of those who want to take personal loans or unsecured loans for various businesses are doing so pledging FDs as collaterals. One of the reasons driving more and more customers to pledge FDs is the high loan-to-value ratio – upto 90-95% — that can be realised from FDs.

HDFC Bank, Federal Bank and Karur Vyasya Bank sanction loans that are up to 90% of the amount locked in the FD.
The banks are happy to have FDs as securities and the figures corroborate the mood – in February this year loans raised by pledging FDs stood at Rs 1.13 lakh crore against Rs 79,000 crore in February last year. It translated into a 43% rise in loans against FDs zoomed in 2022-23. This rate is the highest in the past 10 years according to the Reserve Bank of India data. Banks that always look for safety of their asset before sanctioning a loan, are quite content to get an instrument that carries an almost guaranteed return.

Interest rates of FDs are possibly at their peak in the country prompting the common man to park their surpluses in FDs to enjoy the high and more or less guaranteed interest rates. These instruments are being put to use by many to take loans in times of need.

For the borrower, the advantage of pledging FDs as collaterals is that overdraft facilities extended against such security carry an interest rate that is 1 to 1.5 percentage point above the rate offered by the FD. To attract customers and expand their loan account, banks are offering various paying options to the loanees. With FDs as collaterals banks are also quick to sanction loans and with minimal or even zero processing fees. The paperwork is minimal since customers have already gone through them while opening the FD.