Loans against bank fixed deposits are gaining traction. On a year-on-year basis, these loans jumped by about 25 per cent in April 2011, against about 3 per cent in April 2010.

In absolute terms, loans against bank deposits shot up by Rs 11,966 crore between April 23, 2010 and April 22, 2011, against just Rs 1,286 crore between April 24, 2009 and April 23, 2010, as per Reserve Bank of India's data.

In the current rising interest rate regime, bank customers who have FDs contracted at a lower interest rate in the last few years could find it advantageous to take loans against these deposits for emergencies and to tide over temporary liquidity mismatches, say bankers.

If a depositor contracted a five-year FD two years back at, say, 8 per cent, then he can get a loan against the deposit at 10 per cent, that is, 200 basis points over the deposit rate. This is a ‘steal' as most banks currently have a base rate of 10 per cent, on which load a spread to lend to customers, said a senior public sector banker.

Loans against FDs are a cheaper option as compared to personal loans (on which banks charge interest rates north of 18 per cent).

“The net outgo for the borrower is only 2 per cent in the case of loans against FDs. So, instead of breaking his FD, he could take a loan against it,” said a senior Union Bank of India official.

Banks lend between 10 and 30 per cent of a fixed deposit as loan. As FD is the underlying collateral, banks readily sanction loans against the deposit. Further, banks are comfortable giving these loans as there is no fear of non-performing assets.

In case, a customer wants a loan against his recurring deposit, then the bank will sanction the same against the outstanding deposit at the time the loan application is made.

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