YES Bank has announced the launch of floating rate deposit, a unique product offering aimed at domestic customers. The rate of interest on this product will be linked to the prevailing repo rate, thereby making returns on their deposits dynamic. Here is a review.

What is it

Unlike a traditional FD where the interest rate stays fixed throughout the tenure of the deposit, in this floating rate deposit the interest rate is linked to the existing repo rate (4.9 per cent). This floating rate deposit can be availed for a tenure of one year to less than three years. The interest rates for this deposit are: one year to less than 18 months - 6 per cent; and 18 months to less than three years - 6.5 per cent. These rates of interest are inclusive of bank mark-up of 1.1 per cent (for one year to less than 18 months) and 1.6 per cent (for 18 months to less than three years). The mark-up is additional rate of interest over the existing repo rate.

Senior citizens get an additional 0.50 per cent interest rate for deposit less than ₹2 crore, and up to 0.45 per cent extra for deposit value of ₹2 crore to less than ₹5 crore.

Do note the floating rate deposit interest rates are exactly similar to traditional FD rates offered by the bank for the aforementioned tenures.

There is automatic reset of the interest rate monthly — the benchmark rate will be reset on the first day of every month basis the applicable repo rate on the last day of the previous month. Interest will be calculated on pro-rata basis for every month at the applicable rate of interest. A monthly alert will be sent to customers on effective rate applicable for the month.

You can enjoy liquidity with an overdraft facility on this deposit of up to 90 per cent of the principal value. Do note while there is no lock-in period, premature withdrawal of floating rate deposit attracts penalty at 1-3 per cent, linked to tenure

Standard TDS will be deducted as per the applicable norms. Sweep-in and sweep-out facilities are not available.

Bank health

It may be recalled that YES Bank went into a moratorium in March 2020. It had to be reconstructed while there was a nationwide lockdown due to the Covid-19 pandemic. In 2021-22, the lender recorded credit growth of 8 per cent, while deposits grew 21 per cent.

On June 8, the bank's board recommended to its shareholders that a new board of directors be put in place as the lender is set to exit the reconstruction scheme. The decision to seek an exit from the reconstruction scheme is an indicator that the bank's troubled past may be behind it.

Points to note

Commodity price shocks have shifted the central bank's stance towards inflation containment. Economists project that in FY23 repo rates are likely go up further by 75 basis points (1 basis point is equal 0.01 per cent). In case of increase in the repo rate, there will be an increase in the effective interest rate of YES Bank floating rate deposit. Likewise, any decrease in the repo will lead to decrease in the effective interest rate.

A few PSU banks offer floating rate deposits, but they appear to be aligned to either the bank's treasury bill rates or five-year G Sec rate. Also, the resets in their case happen at longer intervals.

YES Bank's floating rate deposit offers the convenience of taking advantage of interest rate changes without closing and re-booking deposits. They are ideally suited for the financially-literate investor, who is not averse to taking a call on the direction of future interest rates.

Income from floating rate deposits can vary, so this should be the last option for those who view bank deposits as the sole source of income.