Why Banks offer High Interest Rates on Odd Tenure Deposits? Special Fixed Deposits
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- Опубліковано 8 вер 2024
- Have you ever wondered why banks offer higher interest rates for certain deposit tenures while others remain relatively low? It comes down to a crucial aspect of banking known as managing the asset-liability mismatch.
To comprehend the significance of these "special deposits," we must first understand the concept of matching assets and liabilities. At any given time, banks need to maintain a balance between the deposits they hold and the demand for various types of loans. This delicate equilibrium ensures that there is sufficient liquidity to cater to borrowers' needs while safeguarding the bank's stability. Now through a meticulous process, banks evaluate the demand for loans across different tenures and align their deposit offerings accordingly. For instance, if there is a higher demand for two-year loans, the bank may promote longer-term deposits, such as the 700-day deposit mentioned in our example. By doing so, the bank ensures it has enough funds to extend the desired loans, maintaining harmony between its assets (loans) and liabilities (deposits)
However, failing to execute this matching process effectively can lead to disastrous consequences. Historical examples, such as the infamous case of Dewan Housing Finance Corporation Limited (DHFL) in 2019 and more recently, the Silicon Valley Bank, serve as stark reminders of the repercussions of an asset-liability mismatch gone awry. DHFL's downfall was primarily attributed to an improper management of assets and liabilities. The company faced challenges when its short-term borrowing costs exceeded the income generated from its long-term assets, creating an unsustainable financial situation. Similarly, the Silicon Valley Bank encountered difficulties when it experienced a misalignment between its loan portfolio and deposit base, resulting in significant losses and a subsequent restructuring process.
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Disclaimer: I am not a SEBI registered investment advisor or research analyst. The content posted on this platform is purely for educational purposes and none of it constitutes investing or trading advice. Viewers should do their own research and diligence before investing or acting on the information presented
Good content and a basic Knowledge
Thanks!
Thx. Got the basic idea but not understood completely
Here's a post specific to asset-liability mismatch using DHFL as an example and explained in layman terms. finshots.in/archive/game-over-dhfl/
@@shankarnath thx for the article. So even though dhfl has asset - liability mismatch they kept borrowing . Both dhfl and lenders to dhfl got greedy.
Banks like Unity, and even Sriram finance also have high returns on 700 days, 1000 days or other deposits, which aren't multiple of quarters (3,6,9,12 months)
But for a different reason.They show returns as high as 9.5%, but when you calculate, it comes around 8.5%, because they simply skip the interest of the last 1-2 months. They keep money for the entire duration, but only give interest for the complete quarter.
Hence, they essentially keep the money interest-free for few months (upto 90 days, just short of 1 quarter)
They keep high returns on such deposits, because they know that they are actually going to give lesser interest than promised.
I wonder why this is even legal, and why aren't they made to either pay interest for every day that they keep people's money, or only offer FDs, that are exact multiple of 3 months.
Your English is just superb...
Thank you!
I’m sorry but I’m going to assume you are not a native English speaker. I imagine Indian as well. I had a very difficult time understanding with the accent and overall speed.
That being said, good content. And I don’t want to be a hypocrite! I’ve tried learning French for a long time and I’m terrible!
Thank You for this Video Sir 🙃
Most welcome 🙌
❤❤❤
🙌
Sir why bank give us interest in fd
Without interest, we will not keep our money in the bank. So the interest is an incentive for us to part with our money and invest in a bank. The bank then uses our money to give loans and it makes a profit on the different i.e. interest earned on loan minus interest paid to FD depositors like us
@@shankarnath Alright sir thank you sir ❤️
0.25% additional interest is nothing compared to actual inflation rate of 8 - 9%
But what is the logic behind the odd tenure?
As explained, its the asset-liability mismatch in banks i.e. the loan tenure and the FD tenures don't match perfectly. That's why these odd tenure deposits are used to bridge the gap
@@shankarnath Thanks for your Swift response! It is cleared now