Advances against fixed deposits (FDs) have increased sharply by 46.4 percent on a year-on-year basis as of June 30, 2023, marking the highest yearly growth in the last 10 years, according to a Moneycontrol analysis.
As per the Reserve Bank of India’s (RBI) August Bulletin, advances against FD stood at Rs 1.20 lakh crore on June 30, 2023, as compared to over Rs 82,000 crore in the year-ago period.
On a sequential basis, this segment saw a growth of around 9 percent.
Analysts attributed the rise in loans against FDs to lower interest rates on these loans against other loan products such as personal loans, and also to banks favouring such loans due to their secured nature.
“The lagged effect of re-pricing has increased the spreads between various loan products and fixed deposits, tilting the scale in favour of taking advances against FDs. The current trend has made this option a more cost-effective way to borrow money as compared to high interest rates on personal loans and credit cards,” said Swapnil Shah, Director - Research, StoxBox.
According to the analysis, interest rates on personal loans are ranging between 11 percent and 24 percent across private and state-owned banks, whereas the interest on the loan against FD is 1-4 percent over FD rates. Banks are offering FD rates up to 8 percent, as per their websites.
According to Subha Sri Narayanan, Director, CRISIL Ratings Ltd, advances against FD have seen an increase as they are beneficial from the perspective of both customers and banks.
“Customers are able to get loans at significantly lower rates compared to personal loans; in many cases, these loans are available at 1-2 percent above the FD rate,” Narayanan added.
Also read: Share of gold in forex reserves rises, in line with global trend
The loan matrix
As per the analysis, the State Bank of India is offering loans against FDs at over 1 percent over the FD rates while HDFC Bank is offering over 2 percent over its rates.
Similarly, the Bank of Baroda and Indian Bank are offering rates 1 percent over FD rates.
Whereas in the private banking space, Axis Bank and Kotak Mahindra Bank are offering loans in the range of 2-4 percent over FD rates.
Most Indian banks are offering between 85 percent and 95 percent of the value of customers’ FDs. These banks have also stipulated the minimum loan amount customers can borrow.
The customers of State Bank of India can avail 95 percent of the value of their FDs, and Axis Bank customers can avail 85 percent, according to the banks' websites.
Whereas customers of Bank of Baroda, Indian Bank and HDFC Bank can avail up to 90 percent of the value of their FDs.
The significant rise in loans against FDs does not indicate that there is an overheating in the personal loan segment because banks are looking to grow both segments, analysts said.
Further, Narayanan from CRISIL explained that from an overall risk-adjusted return perspective, banks are likely to be focused on growing both segments.
Narayanan added that while loans against FDs stood at around Rs 1.2 lakh crore, unsecured personal loans would be almost 10X at over Rs 11 lakh crore. Also, the customer profile would be different in both cases.
“A customer who is availing a personal loan at a relatively higher interest rate is unlikely to have appropriate assets to pledge as collateral against the loan and hence, would not be a typical loan against FD customer,” Narayanan said.
Who are the borrowers?
Analysts said it is difficult to segregate these loans based on age groups or customer profiles as individuals are using this facility as an emergency fund.
“However, if individuals are using this facility, it indicates emergency fund needs while in the case of non-individuals, it may be a possible sign of liquidity constraint and cashflow mismatch at the corporate, MSME and SME levels,” said Shah from StoxBox said.
When availing loans against FDs, customers need to keep their FD as collateral with the bank and can tap various channels (offline and digital) to avail the same.
Discover the latest business news, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
