Non Callable Fixed deposits

In the RBI's sixth Bi-Monthly Monetary Policy Statement of 2015, a unique form of Fixed Deposit (FD) emerged, known as Non-Callable Deposits. In response to these regulatory guidelines, Axis Bank, a prominent private bank in India, introduced the pioneering non-callable fixed deposit scheme for its clients. To grasp this innovative concept, it's imperative to first comprehend what a callable fixed deposit entails, enabling a clear distinction between the two. 

So, we will first take a short look at what callable fixed deposits are before discussing deeply about non-callable deposits.

What are Callable Fixed Deposits?

A fixed deposit typically allows the account holder to withdraw some or the entire deposited amount before the deposit's maturity date, and such deposits are known as callable deposits. Regarding callable fixed deposits, banks may impose a penalty for early withdrawals, but there is no mandatory lock-in period. Before introducing non-callable fixed deposits, all deposit schemes in India fell under the callable category.

What are Non-Callable Fixed Deposits?

Noncallable deposits come with a predetermined lock-in period. These deposits cannot be prematurely withdrawn except in specific situations such as bankruptcy, court orders, business liquidation, or cases of the depositor's demise. Furthermore, these deposits typically require a lower minimum deposit amount than callable deposits. Since the funds remain locked in until the maturity date, non-callable fixed deposits offer a more attractive interest rate. This article will discuss in detail the Non-Callable Deposits.

Features of Non-Callable Deposits

A non-callable fixed deposit, a unique investment option, comes with several distinctive components:

Minimum Deposit: 

To initiate this FD, a minimum deposit of ₹15,00,001 is required.

Eligibility: 

The scheme extends its eligibility to residents and non-residents, accommodating a broad range of potential investors.

No Early Withdrawals, Except by Court Order: 

You typically cannot withdraw your funds prematurely from this fixed deposit unless a court order is involved, usually in cases of death or bankruptcy.

Maturity Period: 

Investors can select a maturity period lasting from one to two years, allowing them to align their investment duration with their financial objectives.

Auto-Renewal Facility: 

Unlike other deposit schemes, a non-callable fixed deposit does not offer automatic renewal upon maturity.

Interest Rates on the Scheme: 

This deposit scheme offers two distinct types of interest, simple and compound, catering to investors with varying preferences.

Loan Against FD: 

The bank's existing rules permit deposits to be used as collateral for fund-based and non-fund-based loans, contingent on the established criteria. This feature adds a layer of versatility to the investment, offering opportunities beyond the FD.

Importance of Non Callable Deposits

The importance of a non-callable fixed deposit lies in its substantial minimum deposit requirement, such as the ₹15,00,001 threshold set by Axis Bank. It's a viable choice if you anticipate achieving your financial goal within a short period, typically one or two years, without needing early withdrawal. However, if there's a risk of needing these funds prematurely, the higher interest rate might not offset the potential penalties.

Moreover, Axis Bank's Fixed Deposit Plus offers only one- to two-year tenures, limiting your flexibility to hold your funds for extended durations. Keeping money in this deposit for more than a few months isn't possible, and if you want to continue earning interest, the maximum period is two years. The interest rate difference between Axis Bank's regular FD and the non-callable FD is a mere 0.10%, potentially diminishing its overall value.

For most investors, fixed deposits aren't the most prudent investment unless you are a major investor with a significant sum to park for a couple of years without immediate need.

Benefits of Non-Callable Fixed Deposits

Let's discuss the benefits of non-callable deposits.

Higher Interest Rates: 

Non-callable fixed deposits offer more attractive interest rates on the principal deposit.

Stable Funding Source: 

These deposits provide a stable and reliable source of funding for banks, allowing them to hold the funds until the maturity date.

Enhanced Asset Liability Management: 

Non-callable fixed deposits contribute to a well-established and effective asset-liability management system for banks.

Cons of Non-Callable Fixed Deposits:

While the non-callable deposits come with impressive advantages, it has some risk factors too. 

Limited Liquidity: 

These deposits lack liquidity as they cannot be accessed during emergencies unless exceptional circumstances allow withdrawal.

Funds Lock-In: 

Depositors' funds are locked in for the predetermined period, preventing them from capitalising on better investment opportunities that may arise during that time.

High Minimum Deposit: 

The substantial minimum deposit requirement restricts access to a specific class of individuals capable of depositing such a significant sum.

Conclusion

Non-callable deposits offer both advantages and disadvantages. They provide higher interest rates and stable funding for banks but come with limited liquidity and a high minimum deposit requirement.

Investing in non-callable fixed deposits can be a suitable choice under specific circumstances. If you find yourself with a significant sum of money that you don't anticipate needing shortly, these fixed deposits offer a stable and potentially rewarding investment opportunity. The predetermined lock-in period, which prevents premature withdrawals except in rare exceptional cases, ensures that your funds are committed to the investment.

Whether a non-callable deposit suits you depends on your financial situation and goals. Carefully assess all factors and compare rates and terms from different banks before investing in a non-callable deposit.