Should you go for non-callable deposits?

Over the past year, fixed income instruments have been in the spotlight due to rising interest rates and volatile equity markets. In this period the good old fixed deposit (FD) has become attractive again. However, before investing in FDs, one should know about the two variants of this product: callable and non-callable deposits.

Generally, the fixed deposits made by the depositor can be withdrawn before the maturity date with or without premature penalty as per the rules of the particular bank. This is called callable deposit. However, a variation of the fixed deposit exists, introduced in 2015, which is similar to the regular FD but differs in one aspect i.e., premature withdrawal. Deposits that cannot be withdrawn before the maturity date are called non-callable deposits. All FDs were, by default, callable deposits prior to the introduction of this new type of deposit.

The interest rate provided on non-callable deposits is at a premium to the regular callable deposits e.g., Bank of Baroda offers additional 25 basis points on deposits below ₹2 crore and 10 basis points for deposits above ₹2 crore. The interest payout here can be monthly/quarterly/yearly or cumulative as per the option opted for by the depositor. These deposits will be closed before maturity in case of the death of depositor, bankruptcy, or by court or government order.

Pros and cons

Fixed deposits are popular because of the fixed interest rate and the safety of principal. However, another important factor is the liquidity of the FD and the benefit that it acts as a collateral in case of loan or overdraft taken from banks.

Callable deposits provide all these features. Depositors can withdraw these deposits in case of emergency by paying a penalty, which differs from bank to bank. Some banks may waive it as well, for e.g., Equitas Small Finance Bank does not charge premature withdrawal penalty in case the deposit is at least 90 days old in the bank. Non-callable deposit, on the other hand, cannot be withdrawn prematurely and whether it can be accepted as a collateral for loans/advances is purely at the discretion of the bank.

Another aspect to be considered here is the minimum deposit required to make a non-callable deposit, which is higher than for callable deposits. Bank of Baroda, Punjab National Bank, Canara Bank, Central Bank of India and SBI are a few banks that require minimum deposit of ₹15.01 lakh. This figure is quite high for individual investors, given that the DICGC cover is for ₹5 lakh only. These deposits offer 25-50 basis points over the callable deposits (in 1-to-2-year tenure) and some banks, such as SBI and Punjab National Bank, do not offer any premium over the rates of callable deposits.

Should you go for it?

Non-callable deposits are illiquid and not eligible collateral deposits, which are its shortcomings. One may argue that these deposits offer additional interest rate over the callable deposits. However, given the minimum deposit requirement of ₹15 lakh (and more, in some cases) and DICGC cover of only ₹5 lakh per bank, this does not look much attractive. Depositors may therefore pass up non-callable deposits and invest, instead, in deposits of SFBs or AAA NBFCs where the interest rate on deposits, callable or non-callable, is generally higher than that offered by other commercial banks.

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