Fixed Deposit: Pre-mature withdrawal, loan on company FDs explained

Considering the current economic scenario when the government takes all initiatives to contribute to bringing liquidity into the system, housing finance companies (HFC) and non-bank financing companies (NBFC) also reintroduced the liquidity feature in their fixed deposit schemes (FD).

Companies offer pre-mature withdrawal options in company FDs. However, there is no partial withdrawal in these, In case of pre-mature withdrawal, the FD is completely canceled and penalty interest is charged for the period FD was held.

Suppose a person has Rs 10 lakh FD for five years from 2017 and maturing in 2022. If he wants to prematurely close the FD in 2020, then he has to give away 1-2% annually for the last three years of penalty charges. There is also the possibility he may just principal amount but he has to withdraw the complete amount.

Loan against FDs

All NBFCs and HFCs accepting fixed deposits from the public are now offering loans against deposits certain terms and conditions. Any depositor invested in the company's investment funds can apply for a loan against deposits three months after the date of the deposit, and pay 2% above the cash rate during the loan period used.

Depositors have the option to avail loan maximum up to 75% of the original principal amount of the FD, as per his requirement. Also for repayment, the depositor can either payback in one payment or pay partial payments whenever they want, before the deposit expires. If the loan is not paid, the loan amount and interest will be adjusted from the outstanding fixed deposit amount upon maturity.

The loan against deposit gets processed in 4-6 working days. In addition, there is minimum documentation required for which the depositor can contact the main company directly or contact registered brokers appointed by the companies. The depositor will need documents such as the original duly signed FD receipt, pager loan application form from the main company and will require promissory notes with an income stamp.

The deposit loan brings some benefits compared to early withdrawal because it gives the depositor the option to get cash flow according to its requirements. Regarding the availability of funds, the depositor has the option to pay the loan to the main company along with the interest and direct financing will continue as an original investment until maturity.

The effect of interest on the loan on actual investment is comparatively low in comparison to pre-closure charges and lost opportunities lost in the case of pre-mature withdrawals.

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