Banks refuse to remove penalty on premature withdrawal of FDs
By Neelima Shankar
Apr 20, 2009
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Although the public lender, Bank of India (BoI) has decided to withdraw a penalty for premature withdrawal of fixed deposits but its peers seem reluctant on such a move.

The top officials of some of the PSU banks said that they will not follow the lender's move. They said that as interest rates are moving southwards, premature withdrawal of a deposit is a rare thing.

Union Bank of India's Executive Director, S Raman said, "The move on the part of Bank of India is an interesting one, but as far our bank is concerned, we are not considering any such move at the moment. The way the situation is viewed varies from bank to bank. We do not see the rationale for such a move at the moment."

Most of the banks charge a penalty of around 1 to 2% on the premature withdrawal of fixed deposits. However there are some situations where banks do not levy a penalty. "Normally, banks charge a penalty on premature withdrawal, but in some cases, we do not levy any penalty depending upon the urgency of the need to withdraw. Hence, as of now, we are not considering complete withdrawal of penalty levied on premature withdrawal," said Allen C A Pereira, Chairman and Managing Director, Bank of Maharashtra.

At the same time he said that premature of a fixed deposit only becomes intense when the interest rates are rising. "Premature withdrawals often happen in a scenario when interest rates are likely to go up. A customer, who is getting, say 7 percent per annum on his deposit with a bank, may go in for premature withdrawal if interest rate for same maturing goes as high as 10 percent. But, in the economy where interest rates are drifting downwards, customers do not go in for premature withdrawal."

However there are some lenders that allow premature withdrawal of fixed deposits without charging a penalty. They said that customers do not withdraw under normal situations. "Banks these days offer FDs of various maturities ranging between 7 days and 5 years. Customers generally park their funds in fixed maturity tenure, which suits them and therefore, very few premature withdrawals take place," said Arun Kaul, Chief General Manager, PNB.

Meanwhile Chairman and Managing Director of Indian Overseas Bank, S A Bhat said that each bank would take its decision independently on this matter. "All banks will like to reduce deposit rates. However, removing penalty on premature withdrawal of deposits is a matter that each bank will decide on their own. What position our bank will take will be decided by our asset-liability committee."

Bank of India has reduced deposit rates by 25 to 100 basis points on its various maturities along with doing away with the penalty of premature withdrawal of deposits.


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