Term Deposits
Term deposits (known by different nomenclature in different banks) are repayable after a specified period of time. The minimum period of these deposits, at present, is 7 days. The salient features of this kind of deposits are given below:
Interest is payable at periodic intervals to the depositors or as per their instructions.
In case a depositor so desires, the periodic interest can be reinvested in fresh term deposits. Such schemes are generally called ‘reinvestment plans’. In this case, the interest payable is compounded at the specified intervals and the resultant maturity value is indicated on the deposit receipt at the time of issuing the receipt. The head offices of banks issue maturity value charts for the guidance of their branches from time to time.
Recurring deposit accounts are an important variant of term deposit. In a recurring deposit, a specified sum is deposited at regular intervals, generally once a month, for a pre-determined period. On the expiry of this period, the maturity proceeds, which are known at the time of opening the account, are repaid to the depositors or as per their instructions. No recurring deposit is accepted under FCNR(B) Scheme. Some of the banks are offering fixed / flexible recurring deposit accounts in recent times where the customer choose amount of deposit each time based on their convenience.
Cash certificates and certificates of deposit (CD), in demat form or otherwise, are two other variants of term deposits. Cash certificates are issued at discounted value, e.g., a certificate with face value of Rs. 100 and term of 5 years may be issued at, say, Rs. 49. The certificates of deposit are short-term negotiable money market instruments and are issued in only dematerialisedform or as a Usance Promissory Note. However, according to the Depositories Act, 1996, investors have the option to seek certificate in physical form. Further, issuance of CDs will attract stamp duty. In this regard, the RBI has issued Master Circular No. RBI/2015-16/57 FMRD.DIRD. 03 /14.01.003/2015- 16 on “Guidelines for Issue of Certificates of Deposit” dated July 1, 2015. CDs may be issued at a discount on face value. The rate of interest thereon is negotiable with the depositor and may vary on a daily basis. The maturity period of CDs issued by banks should not be less than 7 days and not more than one year. Banks are allowed to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based. The issuing bank/FI is free to determine the discount / coupon rate. The interest rate on floating rate CDs would have to be reset periodically in accordance with a pre-determined formula that indicates the spread over a transparent benchmark. Minimum amount of a CD should be Rs. 1 lakh, i.e., the minimum deposit that could be accepted from a subscriber should not be less than Rs. 1 lakh and in the multiples of Rs. 1 lakh thereafter. There is no grace period for repayment of CDs. If maturity date happens to be on holiday it should be paid on the immediately preceding working day. Banks may, therefore, so fix the period of deposit that the maturity date does not coincide with a holiday to avoid loss of discount / interest rate. All OTC trades in CDs shall be reported within 15 minutes of the trade on the FIMMDA reporting platform.
In respect of term deposits, banks issue Deposit Receipts. These receipts are not negotiable, and therefore, deposits cannot be transferred without the consent of the bank. Certificates of deposits are, however, transferable. CDs held in physical form are transferable by endorsement and delivery. CDs in dematerialised form can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for CDs. Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. However, the Reserve Bank may relax these restrictions for temporary periods through a separate notification.
Banks should include the amount of CDs in the fortnightly return under Section 42 of the Reserve Bank of India Act, 1934 and also separately indicate the amount so included by way of a footnote in the return. Further, banks / FIs should report the data on issuance of CDs on the web-based module under the Online Returns Filing System (ORFS) within 10 days from the end of the fortnight to which it pertains.
Banks normally allow repayment of the deposits before the due date; however, the rate of interest paid to the depositor in case of premature repayment is lower than the rate contracted initially. Auditor has to verify the scheme of fixed deposits thoroughly. If a depositor does not take repayment on the date of expiry, the interest ceases to run from the date, though the bank continues to be a debtor of the depositor. A matured deposit can be renewed by the depositor for a further period. Where a deposit is renewed some time after its maturity, banks generally allow interest from the date of maturity rather than from the date of renewal. In other words, the renewal is given a retrospective effect. In case the deposit is matured and not renewed by the customer, the interest same as saving bank rate is provided on the same as per RBI Guidelines.
Rate of interest payable on fixed deposits as well as other deposits depends on current economic conditions, decided by banks from time to time Interest rates are regulated by an Inter-Bank Agreement which is revised from time to time. The rate of interest on certificates of deposits is negotiable with the depositor, especially in the case of bulk/wholesale deposits.
Following are important issues in respect of different category of which auditor must consider:
(a) FCNR Accounts
Maintenance of position viz. details of deposits – tallying the position with reference to branches periodically.
System of reporting to the position maintenance office by the branches including “C” category branch.
Applicability of notional rate.
Revaluation is done every reporting Friday for CRR purposes.
Provisions/payment of interest on a regular basis to reflect the due liability.
Is it debited to the proper Head of accounts?
Random check of interest as interest is charged every month based on LIBOR.
How the payment is effected-expeditiously?
On payment whether the liability is reversed.
Method of reconciliation of Nostro account with FCNR (B).
It should not be revalued and taken to profit and loss.
Many banks have a separate Nostro account for FCNR (B) balances converted on a notional basis.
Further, RBI, vide its Master Circular No. RBI/2015-16/40 DBR.No.Dir.BC.8/13.03.00/2015-16 dated July 1, 2015 on “Interest rates on deposits held in FCNR (B) Accounts”, provides guidance on the interest rates on deposits held in FCNR(B) accounts. The Circular further prohibit banks to:
i. accept or renew a deposit over five years;
ii. discriminate in the matter of rate of interest paid on the deposits, between one deposit and another accepted on the same date and for the same maturity, whether such deposits are accepted at the same office or at different offices of the bank, except on the size group basis. The permission to offer varying rates of interest based on size of the deposits will be subject to the following conditions:
a. Banks should, at their discretion, decide the currency-wise minimum quantum on which differential rates of interest may be offered. For term deposits below the prescribed quantum with the same maturity, the same rate should apply.
b. The differential rates of interest so offered should be subject to the overall ceiling prescribed.
c. Interest rates paid by the bank should be as per the schedule and not subject to negotiation between the depositor and the bank.
iii. pay brokerage, commission or incentives on deposits mobilized under FCNR(B) Scheme in any form to any individual, firm, company, association, institution or any other person.
iv. employ/ engage any individual, firm, company, association, institution or any other person for collection of deposit or for selling any other deposit linked products on payment of remuneration or fees or commission in any form or manner.
v. accept interest-free deposit or pay compensation indirectly.
(b) Resident Foreign Currency Accounts
Exporters having good track record to open foreign currency account with banks.
RBI will permit.
Unit located in SEZ may hold an account in Foreign Currency.
Diamond Dollar Accounts may be opened with permission from RBI to transact business in Foreign Currency.
The returning Indians can have their foreign currency accounts to be covered into RFC same feature as of FCNR.
(c) EEFC account
Non-interest bearing – No credit facilities against the security of the balances.
100% of inward remittance for Status Holder Exports, professional service rendered in personal capacity.
100% of EOU, STP and EHTP 50% for other payments received from a unit DTA for goods supplied to SEZ.
(d) Non-resident Bank Accounts
Name of such accounts and type of arrangement.
Funding of these accounts – bonafide transactions – freely convertible balance.
System of monitoring overseas bank not to take a speculative view on rupees.
Forward purchase/sale of foreign currencies against rupee for funding is prohibited – offer two ways quote is also prohibited.
Temporary overdrawals to overseas branch/ correspondent not to exceed Rs. 500.00 lakh in aggregate in all overseas branch/correspondent in the books of the bank.
Purpose is essential.
Period not to exceed 5 days.
Statement to be sent to Forex Market Division of RBI.
Further, RBI, vide its Master Circular No. RBI/2015-16/39 DBR.No.Dir.BC.7/13.03.00/2015-16 dated July 1, 2015 on “Interest Rates on Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO) and Non- Resident (External) (NRE) Accounts” provides guidance on the interest rates on rupee deposits held in Domestic, Ordinary Non-Resident (NRO) and Non- Resident (External) (NRE) Accounts.
Further, paragraph 3.16 of aforesaid Master Circular also provides the guidelines with respect to the conversion of a term deposit, a deposit in the form of daily deposit or a recurring deposit for reinvestment in term deposit and states that a bank, on a request from the depositor, should allow conversion of a term deposit, a deposit in the form of daily deposit or recurring deposit, to enable the depositor to immediately reinvest the amount lying in the aforesaid deposits with the same bank in another term deposit. On a review and in order to facilitate better asset-liability management (ALM), with effect from April 20, 2010, banks are permitted to formulate their own policies towards conversion of deposits.
(e) Rupee Accounts (Exchange House)
Accounts opening require approval from RBI.
Trade transaction per transaction upto Rs.2.00 lakh is permitted.
Reconciliation issues and concurrent auditor overseas report.
Debits/claims outstanding as the branches pending receipt of the credit.
Method of value dating the transactions and overdraft arisen thereon.
Collection of overdue interest for such over drawn balances.