Overdue Fixed Deposits & its Impact on Interest Rates?

A Fixed Deposit is a contract between a bank or a financial institution and a depositor.

The agreement usually states that the depositor agrees to keep the deposited amount with the bank for an agreed term in exchange for a specified rate of interest. On the other hand, the bank agrees to pay the interest and return the invested principal on the contract's maturity date.

What are Overdue Fixed Deposits?

Recently, fixed deposits are regaining popularity as excellent instruments to build wealth, particularly with rising interest rates. You can choose the tenure of the deposit based on your financial goals. When the deposit matures, the holder must withdraw or renew the funds for the desired term.

The FD becomes overdue if the deposit holder fails to execute either of the two alternatives. An overdue FD stays dormant with the bank. 

Do Overdue Deposits Earn Interest?

The contract between the depositor and the bank is valid for the agreed term. Hence, when the deposit matures, the bank is no longer liable to pay interest at the contracted rate of interest. So, what happens to the maturity amount? Does the depositor get any interest in it?

In 2021, the Reserve Bank of India (RBI) issued a guideline that required the bank to pay interest that is lower of:

• Savings Account interest rate
• Stipulated rate of interest on the matured deposit

So, if you open a Fixed Deposit of Rs.50,000 with a bank for one year at a rate of interest of 8% and the deposit matures. At the end of the year, the maturity amount will be:

Maturity Amount of the FD=50000+50000 ×8100=Rs. 54000

If you fail to renew or withdraw the maturity amount, then the bank will treat it as an overdue deposit.

Let’s say that the deposit stays overdue for one year. The bank will look at the rate of interest of the matured deposit and the Savings Account. It will choose the lower of the two and pay interest on the maturity amount.

When your deposit matures, let’s say that the rate of interest offered by a Savings Account is 4%. Hence, it is lower than the 8% offered by the matured deposit. So, the bank will calculate interest at 4% for the overdue period.

RBIs regulation applies to deposit accounts maintained with Scheduled Cooperative Banks, Small Finance Banks, State Cooperative Banks, District Central Cooperative Banks, and Local Banks.

Also, Check Top Indian Banks' Fixed Deposit Interest Rates

How to Avoid an Overdue Fixed Deposit

A Fixed Deposit becomes overdue only if you don’t withdraw or renew it on time. Hence, the best way to avoid an overdue deposit is by ensuring that you renew or withdraw the maturity amount on time. 

Usually, customers who create a Fixed Deposit offline have to visit the bank branch to withdraw or renew their matured deposits. If they are unable to visit the branch for any reason, then they risk their deposits becoming overdue. However, many banks allow customers to specify maturity instructions at the time of booking the deposit itself.

One of the best ways to avoid this is by opening a digital fixed deposit. Almost all banks and financial institutions allow you to open fixed deposits online. This gives the benefit to the customers to have the maturity proceeds transferred directly to their Savings Accounts automatically. Alternatively, customers can set auto-renewal for the desired period with their deposits. With digital FDs, many banks also send notifications to customers regarding the maturity of the deposits.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.