Time deposits are money deposits that cannot be withdrawn for a certain term of period of time unless a penalty is paid. When the term is over it can be withdrawn or it can be held for another term. Generally, speaking, the longer the term the better the yield on the money. The rate of deposit is higher than for savings accounts because the requirement that the deposit be held for a prespecified term gives bank the ability to invest it in a higher gain financial product class. There are following types of time deposits.
A) Recurring Deposits :
In recurring deposit, the customer opens an account and deposit a certain sum of money every month. After a certain period, say 1 year or 3 years or 5 years, the accumulated amount along with interest is paid to the customer. It is very helpful to the middle and poor sections of the people. The interest paid on such deposits is generally on cumulative basis. This deposit system is a useful mechanism for regular savers of money.
B) Fixed Deposits :
The deposits can be withdrawn only after expiry of certain period say 3 years, 5 years or 10 years. The banker allows a higher rate of interest depending upon the amount and period of time. Previously the rates of interest payable on fixed deposits were determined by Reserve Bank. Presently banks are permitted to offer interest as determined by each bank. However, banks are not permitted to offer different interest rates to different customers for deposits of same maturity period, except in the case of deposits of Rs. 15 lakhs and above.
These days the banks accept deposits even for 15 days or one month etc. In times of urgent need for money, the bank allows premature closure of fixed deposits by paying interest at reduced rate. Depositors can also avail of loans against Fixed Deposits. The Fixed Deposit Receipt cannot be transferred to other persons.
C) Flexi Deposits (Auto Sweep) :
Flexi Deposit is a special kind of deposit scheme offered by banks in India, which is a combination of Demand Deposit and Fixed Deposits. The depositor is able to enjoy both the liquidity of Savings/Current accounts as well as the high returns of Fixed Deposits.
Mode of Working of Time Deposits :
The scheme has two features which effectively combines the benefits of Savings/Current Accounts and Fixed Deposits. They are as follows :
1) Auto Sweep Facility (Sweep-In) :
Balance in excess of a stipulated amount is automatically transferred to an Fixed Deposit for a default term of one year. Hence, amount in excess of a fixed limit can now earn a substantially higher rate of return. FDs formed through Auto Sweep carry the interest rate on FD of 1 year, prevalent on the day of the Auto Sweep. Hence, the Flexi Fixed Deposit scheme has two components :a Savings/Current Account component, and a Fixed Deposit account component
2) Reverse Sweep (Sweep-Out) :
In case of shortfalls in the Savings account to honour any debit (instruction), e.g. when the customer wants to withdraw money through cheque or through ATM, balance in the FD to the extent needed for meeting the shortfall is automatically withdrawn in multiples of Rs. 1000 or any other amount set by the bank. The remaining balance in the FD continues to earn higher interest at the original rate applicable to FDs.
Hence in case the customer wants to withdraw more than what is deposited in the Savings account component, the bank would withdraw money from the Fixed Deposit component. Hence effectively, this scheme is linking of Savings/Current account with a FD. In many banks, this ” linking ” is free of cost. Many banks do not allow customers to avail loans against amount in the FD component of Flexi Fixed Deposit.