Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Opinion

Banks Sucker You On Automatic FD Renewals

Your bank tries to sell you fixed deposits with an “Auto renewal” facility where, if you don’t say anything, they will renew your deposit for the same term forward.

Turns out they are using slimy, sleazy tricks to sucker you out of the best interest rate you can get.

Look at HDFC Bank’s interest rate structure;

HDFC Bank Interest Rates

You were probably told to have an auto renewal deposit for “1 year one day”. But if you notice above, the one year one day period gets you 9%, which is what you’ll get for a deposit that you put on auto-renew last year.

But look carefully and you’ll see that the 1 year 16 day period gets you 0.25% extra! It’s not like the bank is going to get 0.25% extra for the sixteen days – in fact, if you look at the 1 year 17 day onwards, the interest rate is 8.50%, substantially lower than even the 1 year 1 day rate of 9%.

Whisky Tango Bravo Foxtrot.

Let me try and work out how this came about. Initially you were told about this 1 year 1 day “auto renew” deposit. When enough people started putting money into auto-renew, the bank realized that this money was “theirs” anyhow – that with an auto-renew on, you wouldn’t take away your money (most people won’t even remember, that’s why they have the auto-renew on).

So when they wanted more deposits, they needed to attract new customers with higher rates. But at the same time, they didn’t want to pay higher rates to the deposits that were going to stay with them anyway.

The answer: Offer a better rate for “One year + 15 days to 17 days”. Yes, this is exactly what HDFC bank did earlier.

Now the next set of customers might decide that the term of choice was 1 year and 15 days, and set up THEIR deposits to renew at 1 year and 15 days instead.

The bank then realizes it has a bunch of auto-renewing suckers at 1 year 1 day, and another bunch at 1 year 15 days. Even some at 1 year 17 days.

So it decides that the correct procedure forward is to offer the best deal at 1 year 16 days. So all the poor people who auto-renew automatically get a less-than-best deal for their term. The bank does this intentionally – and if you thing 16 days is good, they might come up with a “1 year 20 days” deal tomorrow that’s better than any of the others.

Simply put, if you auto-renew for any period, the banks will find a way to sucker you. Your best option: don’t auto renew; on the day your deposit matures, put the money into the best deal available.

On a bigger note: This is a slimy way to sucker you out of a good deal, since you trusted the bank. You may argue that this is within the bank’s rights, but please note that the banking system is based on honesty and trust (if everyone withdrew their deposits, the system is screwed). If you take away trust, the system is hosed.

Along with differential interest rates for existing versus new loans for the same term, and pre-payment penalties (unnecessary), such actions eat away a little bit of that trust each time. The systemic impact of doing silly mean things like this is that when the time comes that they actually need money, we’ll move our money to the mattresses, and that will hurt a lot more than the small interest they denied us.

  • raag185 says:

    To think of it, this is done by the supposedly non-slimy HDFC! Don’t believe a word, folks. Don’t trust any banker ever.

    • Sridhar says:

      Bank staff are paid by customers but these Royals treat customers like shit.Thy asking something at a Bank and getting a straight answer.Why cant the RBI make these banks fall in line.One would expect the Banking Ombudsman to be pro-customer,which doesnt appear so.You have used the right words to describt the bank(er)s

  • Yogesh says:

    Spot on. Have been on the receiving end of this scam!
    High time RBI comes up with some regulation that FD int. rates are only to be quoted for months. Else these soulless scavengers will start quoting different rates for 1 year 1 month 8 days, 7 hours, 25 seconds and 1 year 1 month 8 days, 7 hours and 35 seconds :-/

  • kkkg says:

    Deepak,
    Coincidentally, happened to be talking to the manager of the local SBT branch branch, today morning.
    He claims that they auto renew all FDs at the original rate, but you can go at a later date and renew the deposit at a new rate with effect from the original date of renewal!
    PS: hv not checked out if it works 🙂
    kkkg

  • aclarke says:

    – but if you break the FD, wont you have to pay tax immediately ? (even if you put all of it back to FD). Or even in auto renewal this is the case ?
    – also would “debt funds” be better , isnt it ? where it keeps on compounding at market rate , and no worries about tax till you pull out ?

  • Dinn says:

    Will this work in reverse too? that is, in a falling interest rate period, will the banks still auto renew it at a higher rate when their current rates are lower?

  • Krish says:

    I have few deposits with HDFC, SBI and Citibank and here is my experience.
    HDFC : The online FD booking system with this bank is far superior than any other bank. As article pointed out,
    I always opted for ‘no renewal upon maturity’ and it gave me flexibility to rebook FD on my terms.
    SBI: Couple of times I tried the online FD and it do not work. I have to write to Branch Manager to book the FD and e-mail instruction is followed without any hassle. Even if the auto renewal option is there, if we alert them couple of days in advance prior maturity, SBI is ready to roll over the FD as per customer terms.
    Citibank India: Online system of booking FD is tedious. For some reason, Citi FD rates are lowest compared to any other bank in India. Looks like they don’t want any deposits from the customers. These people requires a month notice to change the auto renewal option. Also they won’t accept customer instruction over e-mail. They require to send the signed hardcopy request letter to change the auto renewal option that too a month before. This bank best rate is 0.75% lower than any bank in India. The response is poor and they care less for the NRI customers.

  • Bhupesh says:

    No wonder my 10 year old association with HDFC bank is weakening day by day, even being classified as preferred customer.

  • Sridhar says:

    These new age Banks like HDFC sucker their customers.They dont give passbooks,have a different set of rules for their branches in the same city,lousy rates-charging for everything,sweet-talking customer service,and hordes of customers (25,000+ customers per branch)lowest interest rates.Only recently have they started giving addresses,instead of the earlier sweet talking BPO helpline.They give only ATM-cum-debit cards.No plain vanilla ATM cards.These are”soulless scavengers”-raag85 -you are very right

  • Shankar says:

    Great observation Deepak. Every time I visit your blog, I am gaining a little more financial knowledge. I sometimes wonder if the mainstream news media does not know these things, or choose to ignore these….

  • Ramanand says:

    The biggest joke is the 4% (earlier 3.5%) interest rates on savings accounts. This when RBI itself offers a reverse repo rate of 7.25%. So essentially banks can simply put your money in savings accounts at 4% and give it to RBI and earn 7.25% on it. Risk Free! If RBI thinks that varying interest rates will have an impact, it should also ensure this impact is transmitted to all the savers. Savings A/c interest should move in tandem with Repo rate/rev repo rate. An ideal value would be same as rev repo rate, but since there are inefficiencies in all transactions, a fixed difference over the repo rate would also suffice. For example, savings a/c rate could be 1 pct below the reverse repo rate, thereby benefitting all savers in case interest rates rise.

  • Prashant says:

    TDR/STDR XXXXXXXXXXX123445 MATURING XXXXX ON PL GIVE INSTRUCTION ELSE THE DEPOSIT WILL BE ROLLED OVER FOR THE ORIGINAL TERM.
    SIR. PLEASE TELL ME MEANING OF ABOVE MSG RECD FROM SBI ON MOB.