Why Senior Citizens Should Consider Investing in Bank FDs Now

The RBI Governor, Shaktikanta Das, said inflation must continue to be disinflationary, and MPC is resolute in its commitment to aligning inflation to the target of 4.0% on a durable basis.

He also added that, while core inflation (which excludes food and fuel inflation) has moderated to a historic low, there is a considerable divergence with the headline inflation. Food inflation (which has a weight of 46% in the headline inflation) cannot be ignored. The public at large understands inflation more in terms of food inflation than the components of headline inflation.

The recent Households' Inflation Expectations Survey of the RBI reveals that a large share of the households' higher general prices and inflation-- particularly from food, housing and cost of services.

According to the RBI, the key risks to the inflation trajectory are from...

• Adverse climate events (which remain an upside risk to food inflation)

• Volatile global crude oil prices (on demand concerns)

• Geopolitical tensions

• Pickup in selling prices in the second half of this year manufacturing, services and infrastructure firms (as surveyed by the RBI)

• Revision in mobile tariff rate, which is likely to lead to an increase in core inflation.

Thus, the six-member MPC has decided to remain watchful of how these forces play out going forward.

That being said, in the MPC meeting held between August 6 to 8, 2024, two out of the six members voted in favour of reducing the policy repo rate by 25 basis points (bps) and changing the stance to neutral.

What it means that given some disinflation in the headline CPI inflation and two members already voting in favour of rate cut and change in monetary policy stance, it is possible that in the ensuing monetary policy meetings, as early as October 2024 -- just ahead of Dussehra and Diwali -- the RBI could reduce the policy repo rate by around 25 bps.

If this indeed transpires while the borrowing rates would come down, so will the interest offered on banks term deposits (also known as fixed deposits).

To me, it appears that we are almost near the peak of the interest rate upcycle currently. It looks unlikely that interest rates on bank FDs would increase further.

In the interest rate upcycle, banks in India have persistently increased the interest rates on terms deposits to attract investors (following a cumulative rise of 250 bps in the repo rate since May 2022), particularly senior citizens and those averse to taking a market-linked risk.

The finance minister and the RBI have also been stressing that banks should bring innovative products and interest rates to make deposits attractive (as the gap in the growth rate between credit and deposit growth has widened).

For senior citizens/retirees as well as for other risk-averse investors, this is an opportune time to invest money in bank fixed deposits (and other traditional interest-bearing investment avenues).

Numerous banks are offering attractive interest rates on bank FDs.

However, you need to be careful if a bank is offering an extraordinarily high interest rate on its term deposits because a very high interest rate also means high risk.

[Read: Will Interest Rates in India Fall Soon? Know Here]

The 5 key aspects you should look at when considering a bank to deploy your hard-earned savings are:

1. Reputation of the Bank and Its Size

   Look for banks with a well-established presence and reputation in the market. Banks that are well established, commanding a good reputation, and, particularly those classified as systemically important, are likely to have credible management teams and usually follow robust processes and systems.

   State Bank of India (SBI), ICICI Bank, and HDFC Bank are currently the Domestic-Systemically Important Banks (D-SIBs) as per the Reserve Bank of India (RBI). These are banks that are too big to fail. Hence, when deploying your savings with the bank, size does matter.

   Avoid banks that do not have robust processes and systems, have a smaller deposit base, and aren't among the reputed ones.

2. Capital Adequacy Ratio

   This ratio, also known as Capital-to-Risk weighted Average Ratio (CRAR), is an indicator of how well the bank meets its financial obligation. It is the ratio of the bank's own and supplementary capital to its risk-weighted loans.

   Higher CRAR reflects better financial stability and is less likely to fail. It also reflects the bank's capacity to manage the risks and protect your, the depositor's money. CRAR ensures that the bank has the capital to absorb losses to maintain its financial stability.

   As per the RBI, banks in India are required to maintain a CRAR of 10.875% (including a capital buffer), while the systemically important ones are required to maintain a CRAR of 11.075%.

   Prefer a bank with a higher CRAR when investing in FDs.

3. The Level of Non-Performing Assets

   In the banking business, the asset, i.e., the loans and advances it forwards, turning non-performing for the bank is a key risk. The asset is classified as 'non-performing' when the interest or principal is overdue, i.e., unpaid by the borrower for a period past 90 days.

   When the asset turns NPA, banks are mandated by RBI guidelines to make provisions for the NPA (depending on whether it is a sub-standard, doubtful or a loss asset). Simply put, it is the amount the bank sets aside from their income or profitability in the particular quarter of their NPAs.

   Thus, before deploying your hard-earned penny with the bank, check for their level of Gross Non-Performing Assets (GNPAs) and Net Non-Performing Assets (NNPAs).

   Ideally, the GNPA ratio of the bank you are considering opening an FD should not be more than 5-6%. NNPAs should be even lower - around 1% to 2%. The lower the NPA levels, the better it is.

4. Check If the Bank Is Under RBI's Prompt Corrective Action (PCA)

   The RBI has enforced PCA against several banks in the past due to financial stress.

   The asset quality, profitability, CRAR, and capital structure/debt levels among a variety of other factors that the RBI considers when it puts the bank under the PCA framework.

   When the bank is placed under PCA, there are restrictions on lending, accepting deposits, and the way it conducts business operations.

   As a prudent investor, you should avoid investing with banks that are under the RBI's PCA.

5. Tenure and Investment Plan Offered

   Liquidity, as you know, refers to how quickly your invested funds/money can be accessed when needed. As a senior citizen or retiree, you need to be conscious of this as you may need the money to meet short-term needs or in case of emergencies. Hence, when choosing the tenure and the investment plan of your FD carefully.

   The term tenure of maturity period refers to the time until which you want to deploy your hard-earned money in a bank FD. Ideally, assess your liquidity to choose the tenure of the FD.

   Say, you wish to receive a regular interest payout, it makes sense to choose the monthly interest payout or quarterly interest payout option as opposed to the cumulative or reinvestment option. But, on the other hand, if you wish to deploy money to address a short-term financial goal that is 18 months hence, then the cumulative or reinvestment option would make sense.

   Choosing the term and FD plan carefully shall ensure that you don't prematurely withdraw from the bank FDs.

The Investment Strategy to Follow When Investing in Bank FDs

To ensure the liquidity of the investments made in FD, following a laddering strategy is meaningful.

Fixed Deposit laddering is a smart investment strategy, wherein you spread your investment in FDs over multiple maturity tenures or maturity buckets.

Say, one has a lumpsum of Rs 25 lakh to invest. Instead of deploying all the money in one maturity bucket, by dividing the sum into five maturity buckets with attractive respective interest rates, you could earn a higher sum as interest.

The illustration below explains how one can allocate investment in Fixed Deposits across maturity dates:

Note that you don't need to invest an equal sum across maturity periods to follow the laddering strategy. You may invest a bigger sum for a period that offers higher rates of interest.

Also, you don't need to make investments in FDs with just one bank to follow the FD laddering strategy. It could be followed across banks to reduce the concentration risk. Note the DICGC insurance cover of Rs 5 lakh is available per depositor, per bank.

The point is that with one FD maturing at specified intervals, you will have the maturity proceeds available to use (for whatever purpose). Plus, the interest earned would be higher for longer maturities, enabling you to earn potentially higher returns.

The FD laddering strategy ensures that you have one fixed deposit maturing at the end of every year. It will free up the capital systematically. It is particularly a useful strategy for retirees or senior citizens.

The maturing FD can either be used to meet liquidity needs and/or be reinvested, depending on your requirement and the prevailing interest rate scenario.

At the peak of the interest rate upcycle, it makes sense to invest more in medium-to-long maturities than shorter terms. The bank FD strategy also makes sense if you are considering investing in a 5-year tax-saver bank FD as well.

The 5 Key Benefits of Following the Bank FD Strategy Are:

• ✓ Diversifies investments across various maturity buckets

• ✓ Different maturity periods create investment loops (providing the option to reinvest)

• ✓ Potentially earns higher interest along with the safety of capital.

• ✓ Addresses liquidity needs with staggering income of the maturity proceeds, helping to avoid premature withdrawals

• ✓ Averages out interest rate fluctuations

Hence, thoughtfully invest in bank FDs following the laddering strategy.

The Tax Implications of Investing in Bank FDs

The interest earned on bank FDs is taxable under the head "income from other sources" as per you're the assessee's income tax slab, i.e. at the marginal rate of taxation.

For senior citizens, a deduction of up to Rs 50,000 (from the Gross Total Income) is available under Section 80TTB of the Income Tax Act, 1961, provided you opt for the Old Tax Regime (OTR).

Given that interest earned on a Bank FD is taxable, senior citizens whose income is below the basic exemption limit should submit Form 15H (a declaration under Section 197A of the Income Tax Act, 1961) at the start of the financial year to the respective bank so that tax is not deducted at source (TDS).

To avoid TDS, one may split bank fixed deposit investments across financial years, alongside investing in different family members' names whose income is below the base exemption limit.

In conclusion...

If you follow a thoughtful approach and astutely invest in bank FD now while interest rates are high and almost peaked, you will be able to earn a respectable sum as interest, address your liquidity needs, and add to your financial security.

Happy Investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.