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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.

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