Due diligence. Sweep facilities have strings attached

You are thrilled that you have an automatic ‘sweep’ facility that moves excess money from your savings account into a fixed deposit. Or maybe you opened a flexi-deposit account hoping for more freedom on your allocations. In both cases, the deposit will now fetch much higher interest than the 4 per cent that most banks offer on savings bank (SB) accounts. At the same time, you don’t lose out on liquidity, as money can be pulled back into your SB account from these deposits at any time. While this seems simple and convenient, there can be strings attached to such accounts that affect you, the customer.

Reverse sweep itches It is true that many banks offer a reverse sweep from a deposit to a SB account (in multiples of ₹1,000, ₹5,000, etc.) if the balance in the savings account falls below the minimum required. But consider this case reported in the latest Annual Report of the Banking Ombudsman.

A customer alleged that he had fixed deposits of ₹30,000, which were not reverse swept when his savings account balance went below the minimum required balance of ₹20,000. When he withdrew ₹5,000 from an ATM, it pushed his balance below the minimum. Subsequently, ₹1,124 was debited for non-maintenance of minimum balance. On being questioned by the Ombudsman, the bank replied that the reverse sweep provision was not available if the minimum balance limit was breached due to cash withdrawals using debit cards.

Cash withdrawal from an ATM being one of the most common transactions, the bank’s explanation was not accepted by the Ombudsman. What’s more, since the bank had not informed customers about this provision either through brochures or its website, it had to reverse the amount debited from the customer’s account.

A reverse sweep trigger is necessary in several circumstances − if you have issued a cheque, but there is not enough balance in your account to honour it, or when you have set auto debit triggers for bill payments, or have systematic investments in place, all of which could send your savings bank balance below the minimum threshold or wipe it clean. Hence, it is better to check with your banker as to when, how, and in what multiples of rupees the reverse sweep is applicable before you sign up for this facility. While almost all banks reverse sweep the money on a last-in-first-out basis, hurting you less, it is advisable to check on this too.

Another area which needs scrutiny is the maximum sum you can transfer to a deposit, the time period you can hold it there and the interest rate you can earn. Trigger amounts for the sweep facility vary across banks or even across different categories of savings accounts offered by one bank. A lower trigger could help you maximise interest earnings.

For example, the trigger for sweep into an FD from HDFC Savings Max is ₹1 lakh and even then, the minimum amount that will be swept is ₹25,000, implying a trigger at ₹1.25 lakh. That could mean that funds up to ₹1.25 lakh will stay idle in your savings account, which could have earned more interest had the trigger been lower. This matters more when this account is only a second account or is not the one from which you regularly withdraw for your expenses.

On the other hand, SBI’s Savings Plus account allows you to set the trigger yourself, beginning at as little as ₹5,000. The minimum deposit is at ₹10,000.

Coming to tenures, like Axis Bank’s offer of six months to five years tenure for its Encash 24 flexi-deposits, many banks allow you to choose the tenure of the deposit. This flexibility is important, as you can choose the time bucket offering the maximum interest rate at the time of making the deposit.

Bank of Baroda’s Super Savings Account, for instance, sweeps out excess funds only to a 181-day deposit, while HDFC Savings Max sweeps them strictly to a one-year and one-day deposit. Shorter tenures also bring with them the hassle of constantly renewing deposits or finding new avenues to invest the proceeds.

Other factors There are also other factors to be checked, such as whether interest will be compounded or paid out and whether premature withdrawal penalties are applicable. Take City Union Bank’s Flexi Fix FD, for example. Here, interest is not compounded. The bank pays out the interest earned every quarter. There is also a token charge of ₹25 for each withdrawal. Some banks don’t charge this fee, but may penalise premature withdrawals.

So don’t blindly opt for a sweep facility or a flexi-deposit as a quick-fix to maximise interest income. Take the time to sit with your banker and get a detailed list of terms and conditions.

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