The Term Deposit is a unique kind of investment created by allotting a certain amount of money within a financial institution for a stipulated period. These kinds of deposits carry maturity period ranging from 1 month to some years like 6 years and they will have certain levels of minimum deposits available.
We always hear about the phrase known as the “Term Deposits”, let us understand the concept of Term Deposits. It is also known as the Certificate of Deposits in the United States of America and in Canada it is known as the Guaranteed Investment Certificates.
As an investor you should be very careful while purchasing the term deposits and depositing amount as they can withdraw the amount only after the term ends. Going by the dynamic changes taking place in our lives, it is beyond our control as to when we will experience the shortage of funds.
However, in some situations, although not confirmed the bank may allow the investor early release from the Term Deposit Scheme, if they are giving some days’ notice. Furthermore, the interesting part is that the investor must cough up some funds as penalty for doing the same.
Term Deposits higher rate of interest compared to the conventional savings account, where in the customer can go ahead and withdraw the money at any point of time.
Banks will invest money in other financial services and products that will give them the highest Rate of Return (ROR). The bank will lend the money to its other clients, and hence receiving highest rate of interest from the borrowers, compared to the amount that the bank will pay as interest for the Term Deposits.
If you take the case in KBL, A lender will provide 6% rate for the Term Deposits with a 4-year maturity and the amount deposited into the bank is organised as the loans to the borrowers, who are charged 9% as the Rate of Interest on those money.
The difference that the bank pays its customers for deposits done and rate of interest it charges from the borrowers is called as Net Interest Margin (NIM).
When the Rate of Interest reduces, the customers are encouraged to borrow the funds and spend them there by encouraging the economic growth. If the banks offer a low Rate of Interest is imposed by the bank on the depositor’s amount, then without a shadow of doubt, the bank will lose the customers, as more than 90% of the customers in India will go for other alternative investment fetching higher Rate of Interest.
The concept of Term Deposits is gaining lot of momentum over the years and it is also known by the name of “Certificates of Deposits”. The customers depositing the amount in various banks in India will get the conditions of the deposits using the paper statements.
This statement can be sent by email/courier and consist of details like:
Furthermore, if a customer wants to close the Term Deposit before the end of the duration, the customer will be asked to pay some amount as penalty towards the same. The penalty will also consist of the loss of any interest paid on the deposits amount till date.
When the term deposit is about to expire, the concerned bank will send out the letter giving details to the customer about the upcoming maturity dates. Bank will ask the customer, if they want the deposits to be renewed for the same duration as earlier and rate of interest will change as per the market scenario.
Banks are not just financial institutions; they are the business enterprises as they would love to impose lower rates for the term deposits and charge a higher rate to various borrowers for the loans. Furthermore, there is certain amount of balance required that the banks need to maintain and if you pay less interest then it will not attract new customers towards the Term Deposits Accounts.
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