Advances against the bank’s own Time Deposit Receipts (TDRs) refer to a type of loan facility offered by banks where they provide loans to customers against the security of their own Fixed Deposit (FD) accounts. In this arrangement, the FD acts as collateral for the loan, providing assurance to the bank that the borrowed amount will be repaid. Here are detailed notes on advances against the bank’s own Time Deposit Receipts:
1. Purpose: Advances against TDRs are offered to customers who may require funds urgently but do not wish to prematurely withdraw their FDs. This facility allows customers to access liquidity without breaking the FD and losing the interest benefits.
2. Eligibility Criteria: To avail advances against TDRs, the customer must fulfill certain eligibility criteria set by the bank, including:
- Having an FD account with the bank.
- The FD should be in the name of the same individual or entity seeking the loan.
- Meeting the bank’s creditworthiness and risk assessment criteria.
3. Loan Amount: The loan amount is typically a percentage of the value of the FD, known as the “loan-to-value” ratio. The actual loan amount depends on the bank’s policies and may vary from one institution to another.
4. Interest Rate: The interest rate on advances against TDRs is usually lower compared to other types of loans because the FD serves as collateral, reducing the risk for the bank. The interest rate may be fixed or floating, depending on the bank’s terms.
5. Repayment Tenure: The repayment tenure for advances against TDRs is generally shorter than the remaining tenure of the FD. It is designed to align with the customer’s requirements and cash flow while ensuring that the loan is repaid before the FD matures.
6. Repayment Options: Customers can choose from various repayment options, such as monthly installments, lump-sum repayment at maturity, or bullet payments (where the principal and interest are paid together at the end of the tenure).
7. Advantages for Customers:
- Immediate Access to Funds: Customers can access funds without prematurely withdrawing their FD and losing interest benefits.
- Lower Interest Rates: The interest rates on advances against TDRs are typically lower compared to unsecured loans, making it a cost-effective borrowing option.
- No Need for Additional Collateral: As the FD serves as collateral, customers do not need to pledge additional assets or provide guarantors.
8. Risks for Customers:
- Risk of Default: If the customer fails to repay the loan as per the agreed terms, the bank may use the FD as collateral to recover the outstanding amount, leading to the loss of the FD.
9. Risks for Banks:
- Market Fluctuations: If the FD’s value declines significantly due to market fluctuations, it may affect the bank’s ability to recover the full loan amount in case of default.
10. Impact on FDs: During the tenure of the loan, the FD continues to earn interest, but the loan amount is deducted from the total available credit limit. Once the loan is repaid, the remaining FD balance becomes accessible to the customer.
Advances against the bank’s own Time Deposit Receipts offer a convenient and secure borrowing option for customers who need short-term funds while keeping their FD investments intact. It provides a win-win situation for both customers and banks, with customers accessing funds at lower interest rates and banks mitigating the risk through the collateral of the FD.