r2i forum

Dear Friends:
I understand that there is a facility to avail loans against FDs in India. How does it work? During the loan period, do I get to gain the interest on my FDs? Please throw some light.
Thanks.

Yes, you will get interest on FD.
FD will be a collateral against the loan. The interest you pay on the loan will be higher than the interest you earn on your FD.

Desi: Thanks for the response. Just to clarify - if I keep say a 1L FD with the bank for an interest rate of say 6%, and interest on the same amount of loan is say 11%, then essentially I am paying the differential of 5000 INR a year? Any strings?

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Any strings?
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Generally there are no serious strings, but you have to check with the bank.

The amount of loans against FCNR account FDs can be as high as 90% of FD. Against some other FDs (local rupees), the amounts are 80%. For some local FDs (resident), this loan is not available. The specifics of your situation are not known, whether it is NRE FD or resident FD etc. Generally with specifics known and if your specific bank is known, details can be found from their website.

One thing to remember is that there will be some strings - for example if your FD tenure is 5 years and you want a 10 year loan, then you will have to increase your tenure or pay back earlier when the FD matures.

Thanks Desi. As always, your responses are very helpful.

I know lot of retirees like Bank FDs. They are better than bond funds nowadays. Bank fixed desposits pay very well >8% is very common, and bond fund returns are lagging behind bank fds.

Usually banks charge 1.5%-2.5% more for loans secured by FDs, not 5% differential.

The interest rate is calculated on day basis. So, if some one is looking for a short term loan, for emergency purposes instead of closing FD, it is better to take a short term loan and pay it back. The fixed deposit may continue to earn higher interest for long term deposits.

Some bank accounts also offer sweep facility, by which your fixed deposit can be broken into small pieces for withdrawals.

For example, HDFC bank offers sweep at Rs.1000 mutliples. Say you have Rs.2L deposit with bank and wish to avail Rs.5K for emergency purpose, you can write a check for Rs.5K, bank will take 5K out of 2L and pay your check. For 5K, bank will pay applicable int rate with some penalty. By this option, only the 5K is affected. Remaining 1.95L can continue at higher int rate.

Alternatively one can choose loan against the deposit and pay it back.

Thanks for info. If a resident Indian(relative in india) takes loan against my NRE FD, will repayment of loan go back to NRE account? or will it be separate loan account for resident and NRE FD is just collateral?

poor;3978Thanks Desi. As always, your responses are very helpful.

rakamaka;304984Thanks for info. If a resident Indian(relative in india) takes loan against my NRE FD, will repayment of loan go back to NRE account? or will it be separate loan account for resident and NRE FD is just collateral?

1. I do not think that the bank will give loan to someone else with your NRE FD as collateral. You will have to take the loan and then give the money to your friend or deposit loan money into an account to which you give him mandate. But this is my guess only. You need to have your relative walk to the bank and talk with them and check.

2. When bank loans you the money, the repayment goes back to the bank. So why would repayment go to NRE account?

3. Your question on loan repayment going into a separate account - I really do not understand what you are asking. The bank gives you loan, you repay, it goes back to bank and what they do with the money is none of anyone else's business, so I fail to understand your query as to which account the loan repayment will go to.

4. It is possible that you do not understand what collateral means. Collateral does not mean that loan if from the collateral account. Collateral is equity interest which is used for recovery in event of a default.

Thanks for details. I will clarify more. My friend in India needs money. Which will be better option..for me as well as his credit with bank..
1) i gave money directly to my fiend and hope he will return it in good faith. He can save on loan interest.
2) he gets loan against my NRE/NRO FD. But pays loan interest(2% higher than NRE/O FD earning rates). I have more control over my FD.

#9, if your friend does not pay, you will lose your money in either case!

As Desi pointed out, a bank may not give loan to A on person B's FD. They may do that when the accounts are related and may have a shared customer ID (say loan to A on A's HUF FD, etc) or A's firm on A's FD.