How does this facility work?
Some banks avoid publicising this facility in order to maintain a high Current Account Saving Account (CASA) ratio. A high CASA ratio helps in reducing the cost of deposits for the banks, thus increasing their net interest income.
Also, the auto-sweep facility is known by different names in different banks and therefore it is important for you to discuss it with your bank and activate it, if you want to.
The working of an auto-sweep facility is pretty simple
- Firstly, decide on three things: the maximum amount you want to deposit in your savings account. This is known as the threshold limit.
- Secondly, decide on the FD amount
- Lastly, decide the tenure of the FD
Once these three things are decided, the remaining task is performed by technology which works according to your instructions.
Suppose you deposit an amount of Rs 30,000 in a flexi-deposit scheme on September 1, 2008. The minimum amount to be maintained in a savings account is Rs. 5000 and you fix the threshold limit at Rs. 10,000. The remaining 20,000 would be automatically transferred to the fixed deposit scheme and will earn you a higher rate of interest. You will be required to maintain a minimum balance of Rs. 5000 in your savings account.
Next year if you want to withdraw an amount of say Rs. 15000 from your account, you can withdraw only Rs 5000 from your savings account since your savings account has an amount of Rs. 10,000, out of which Rs. 5000 has to be maintained in the account as the minimum balance.
Therefore the rest of the amount (Rs. 10,000) is withdrawn from the FD. This is called Sweep-out or Reverse Sweep. The FD is now reduced to Rs. 10,000.