Fixed Deposit as a Security for the Loan/Advance :
When money deposited by a customer is not repayable on demand and is payable on the expiry of a specified period from the date of deposit such a deposit is called a ‘Fixed Deposit’. The banker evidences a deposit by issuing a receipt known as fixed deposit receipt. Interest, is paid at regular intervals at a specified rate on such deposits. Banks usually permit depositors to borrow against the deposit. This security is certainly the most valuable, as the money represented by the receipt is already with the bank and there is no problem of valuation or enquiring the title, or the problem of storage and costs associated with storage.
Precautions
(i) The banker should grant the advance only to the person in whose name the money is deposited. Banker should not advance against fixed deposit receipts of other banks. This is because the banker who has received the deposit will have a general lien over such monies. Even if the lending bank gives notice to the bank, which has received the deposit, the latter may even refuse to register the lien in favour of the lending bank.
(ii) If, the deposit is in joint names the request for loan must come from all of them.
(iii) When the deposit receipt is taken as security, the banker should ensure that all the depositors duly discharge it on the back of the instrument, after affixing the appropriate revenue stamp. In addition to this, the banker should obtain a letter of appropriation which authorizes the banker to appropriate the amount of the deposit on maturity or earlier towards the loan amount.
(iv) After granting the advance, the banker must note his lien in the fixed deposit register to avoid payment by mistake and the lien, must also be noted on the receipt itself.
(v) Advance should preferably not be made against fixed deposit receipt in the name of a minor, unless a declaration is taken from guardian, that loan will be utilized for benefit of the minor.
(vi) Where the money is being advanced against the fixed deposit receipt issued by another branch, the FDR duly discharged must be sent to the branch, where such money is deposited, for the following purposes:
(a) To verify the specimen signature of the depositor
(b) To ensure that no prior lien exists on the fixed deposit receipt
(c) To mark lien on the FDR and the FDR register, in favour of branch advancing money.
(vii) Sometimes, a person may approach for advances by offering the fixed deposit receipts held by third parties as security. In such a case, the fixed deposit receipt must be duly discharged, by the third party, i.e., FD holder and he should declare in writing the bank’s right to hold the deposit receipt as security, and also to adjust the deposit amount towards the loan account on maturity or on default in repayment of instalment if any.