Banks play numerology with FD rates

At first, it seemed banks had caught the numerology bug. What else could explain the high interest rates on fixed deposits (FDs) with odd tenures? ICICI Bank is offering 8% interest on FDs for 390 days whereas one-year deposit earns 7.75% interest.
HDFC Bank is ready to give you 1.25% extra if you hold it for 16 days more than a year (which earns 6.5% interest ). On 22- and 33-month deposits, it offers 8.8% interest.Standard Chartered Bank has fixed the interest rate of 121-179-day and 261-day FDs at 7.75%.
Public-sector banks are not far behind in this number race. Allahabad Bank will give you 8% interest for a 300-day deposit. State Bank of India and Punjab National Bank are offering 8.25-8 .5% interest on 555- and 1000-day FDs.
The opportunity is too good to ignore. You can earn 0.25-1 .25% guaranteed higher returns by locking in money for a few days more than one year or its multiples. Except, numerologists ’ forecasts is a risky way to determine an investment period. What if they think of new number midway in the tenure?
You don’t have to worry. For the banks have a very logical reason for offering higher interest for odd tenures. It is called the loan cycle.
KVS Manian, group head, retail liabilities and branch banking at Kotak Mahindra Bank, explains, “These time periods are meant to match the bank’s asset and liability in a particular bucket. Say, it has higher demand for one-year loans, then it will offer a 390-day deposit. Similarly, the 700-day deposits are meant to match the asset and liability for two-year loans.”
Simply put, banks are ensuring they have money to give loans by extending the tenure of matching FDs. As the FDs mature a little later, it gives them more breathing space to get the money back from the borrowers and return it to the depositors . For this to happen, banks must incentivise the odd lock-in periods. There is no better way than offering a slightly higher interest than the traditional tenures.
Like traditional FDs, you will earn a lower interest rate if you break the deposit before it matures. “ If a customer makes a pre-mature withdrawal, he earns a lower interest which applies to the tenure shorter than that of the specific scheme. This acts as an automatic penalty, though there is no pre-mature withdrawal charge.” says Manian.
This shouldn’t bother you much. If you have an emergency fund stashed away in a sweep-in account or other liquid instruments , it is unlikely you will need to break these special FDs. Even if you do, you won’t earn lower interest than traditional deposits.
This doesn’t mean you divert money for equities to these schemes. However, if you were planning to park money in safe havens, the odd-tenure FDs are a good choice.