As interest rates on deposits take a downward spiral, public sector banks are following their private sector peers to charge foreclosure penalty on retail fixed deposits. The decision stems from their fear that customers may migrate to other modes of savings as FDs turn less attractive with lower rates.
State Bank of India, Bank of Baroda and Indian Overseas Bank (IOB), among others, have introduced foreclosure penalties that result in deduction of 0.50% to 1% of the interest rate on fixed deposits.
Private banks such as HDFC Bank and ICICI Bank have been charging foreclosure penalties, while the PSU banks were offering penalty waivers to attract depositors and mobilise resources.
Banks also used to have specialised schemes where the depositors were not penalised for closing their deposits and in fact, were paid interest up to the date on which the FD remains with the bank, irrespective of whether it was due for maturity or not. Some banks such as Corporation Bank and Union Bank of India, however, continue to have no penalty on foreclosure.
Most banks have revised downwards their deposit rates by 25 basis point with the average interest rate of a one-year term deposit quoting around 7.5%. Earlier, banks had various schemes under which the foreclosure penalty was waived.
An IOB official said, "The foreclosure penalties at IOB are applicable from January 7."
While SBI does not charge any foreclosure levy for deposits of Rs 15 lakhs and above if the deposit has remained with the bank for at least 7 days. For deposits below Rs 15 lakhs, the bank charges a penalty 0.50% per annum and no interest rate will be paid. A senior SBI official said the bank had special schemes where no penalties were charged on foreclosure but those schemes have wound up.
ICICI Bank did not have any specific scheme for interest waivers.
In case of the fixed deposit being prematurely closed for the purpose of reinvestment into another scheme of fixed deposit, the existing deposit would be subject to a penal rate of interest. And if the fixed deposit is closed before completing the original term of such deposit, interest will be paid at the rate applicable on the date of deposit for the period for which the deposit has remained with the bank. The deposit may be subject to penal rate of interest as prescribed by the bank on the date of deposit.
While HDFC Bank charges a penalty of 1% on the applicable rate of interest for premature withdrawals, including sweep-ins and partial withdrawals. However, the foreclosure penalty is waived for fixed deposits booked for a tenor of 7 to 14 days with the bank.
Don’t bank on returns-HBL
Investors in public sector banks (PSBs) have not been laughing all the way to the bank.
Muted earnings growth and rising stock pile of bad loans and restructured assets have eroded PSBs’ capital. Many of them are just about meeting their capital requirement and a large amount of their restructured loans could turn bad and eat into their capital.
In the past, state-owned banks depended on the Government for their capital requirements.
The Government has made capital infusion of ₹58,600 crore in the last four years (2011-14) with plans to infuse ₹11,200 crore in 2014-15. But Government’s backing has only increased the moral hazard and has left minority shareholders short-changed.
Most of the public sector banks are trading well below their book value. Capital infused at such abysmal valuations has eroded their book value by almost 50 per cent in the past.
Ensuring adequacy
The Government’s share in state-owned banks varies between 55 and 82 per cent. By diluting its stake, the Government can raise funds to take care of the needs of some of the larger banks. But what’s good for the banks may not be the best for investors. The implicit backing by the Government does not take away the risks. Most of these banks trade at a low valuation for a reason — operational inefficiency, bad asset quality and corporate governance issues.
The Government’s share in state-owned banks varies between 55 and 82 per cent. By diluting its stake, the Government can raise funds to take care of the needs of some of the larger banks. But what’s good for the banks may not be the best for investors. The implicit backing by the Government does not take away the risks. Most of these banks trade at a low valuation for a reason — operational inefficiency, bad asset quality and corporate governance issues.
Banks such as Central Bank, United Bank, Bank of Maharashtra and IDBI Bank, where the Government holds more than 75 per cent stake, are also the ones where the capital need is high. For instance, Central Bank has a tier I capital of 7.4 per cent (6.5 per cent norm) and very high stressed assets of 20 per cent. United Bank, which has a tier I capital of 7.2 per cent, has bad loans alone at 10.78 per cent of loans. These may be risky.
The scene for companies such as Power Finance Corporation and Rural Electrification Corporation that lend to the power sector is hazy as well. These companies are obvious beneficiaries of power sector reforms but there have not been many changes on the ground. Improvement in the financial health of State Electricity Boards and ensuring availability of raw material for power projects are all a big ‘if’ to re-rate these stocks.
Also, given the recent regulatory leeway that allows banks to raise infrastructure bonds, the competition is expected to intensify, which will likely impact the pricing power of these players.
Good picks
But banks such as Bank of Baroda, State Bank of India and Bank of India are better placed in terms of capital ratios and have also been able to contain slippages in bad loans better. These may be safer bets for investors who are keen on PSU banks.
But banks such as Bank of Baroda, State Bank of India and Bank of India are better placed in terms of capital ratios and have also been able to contain slippages in bad loans better. These may be safer bets for investors who are keen on PSU banks.
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