Sucheta Dalal :Fixed Deposits: Call option for finance companies
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Current Articles » Fixed Deposits: Call option for finance companies
                       Previous           Next

Fixed Deposits: Call option for finance companies  

August 23, 2012

Under the RBI ordained “call option”, finance companies are officially allowed to return deposits anytime after three months of raising funds. Is this fair to the investors?

Sucheta Dalal

Anil Agashe, a professor of finance and a very aware investor, was surprised when First Leasing Company of India, based in Chennai, unilaterally refunded his fixed deposit by simply mailing him a cheque with a letter saying that it is doing this in accordance with the Reserve Bank of India (RBI) rules. At a time when interest rates are high, the company has told depositors that it is finding it difficult to deploy funds and it is reducing interest to 7% on one-year deposits. The RBI guidelines for accepting deposits, as it turns out, allows finance companies to refund deposits at their sole discretion after three months. In this case, First Leasing has also said that it is reducing interest rates to 7% for one-year maturity deposits. But, as Prof Agashe correctly asks, how and why has the RBI allowed finance companies to unilaterally refund deposits? It is like an RBI-ordained ‘call option’ to allow finance companies to return money any time they want to.

While depositors like Prof Agashe feel aggrieved, it must be remembered that in all cases in the 1990s, when companies or Unit Trust of India offered foolishly high rates of interest rates on bonds or funds, they were allowed to renege on their commitments. These were usually deep discount bonds, which had promised interest rates ranging from 16% to 18.5% over periods of 18 to 20 years.
The Narmada bonds, offering 18.5% interest over 20 years, could, in fact, have bankrupted the Gujarat government if they had not been prematurely redeemed. Usually, this happened after a court battle; but RBI ensures that finance companies under its regulation are officially allowed to make a unilateral decision to return deposits anytime after three months of raising funds.

-- Sucheta Dalal