Auto-renewal of Term Deposits: A Convenient Trap for Unclaimed Funds?
Chandramouli Mohan 14 June 2024
When you read this news, RBI Slaps Rs11.50 Lakh Penalty on 3 Cooperative Banks from Uttar Pradesh, you think the regulator penalises the banks that are non-compliant in transferring the unclaimed deposits to the depositor education and protection fund (DEAF) within the prescribed period.
 
It may be a shock of the day if you come to know that there is a loophole in the system which paves the way for the banks to perpetually renew the term deposits and they never need to transfer them to unclaimed deposits to DEAF. This article delves into the ambiguity and inadequacy in the regulatory guidelines.
 
Important regulatory guidelines on inoperative accounts and unclaimed deposits
 
2. RBI has taken a significant step towards consolidating and rationalising the framework governing inoperative accounts and unclaimed deposits. On 1 January 2024, RBI issued a comprehensive set of instructions, under the circular (RBI/2023-24/105 DOR.SOG (LEG).REC/64/09.08.024/2023-24), which aims to streamline the classification and activation processes for such accounts.
 
The extant guidelines of RBI (including the above two) do not touch on auto-renewal of term deposits continuously by the banks. There are certain provisions in the master directions issued by RBI which are ambiguous and are conveniently (mis)interpreted by banks in perpetually enjoying the funds of the customers.
 
A peculiar provision most misinterpreted
Master directions on the interest rate on deposits issued by RBI provide the following guidelines about renewal of overdue deposits.
 
2.13. Renewal of overdue deposits
All aspects concerning renewal of overdue deposits may be decided by individual banks subject to their board laying down a transparent policy in this regard and the customers being notified of the terms and conditions of renewal including interest rates, at the time of acceptance of a deposit. The policy should be non-discretionary and non-discriminatory.
 
Based on the above master directions, most of the banks have a board-approved policy on the renewal of overdue deposits on the similar lines given below.
 
Unless there are specific instructions to the contrary, term deposits will be renewed for the same tenure as was for the matured term deposit and rate of interest would be as prevailing on due date.
 
The conundrum of auto-renewal
A common practice among many Indian banks is the auto-renewal of term deposits on maturity, especially in the absence of explicit depositor instructions. This policy, while convenient for maintaining the continuity of investments, raises a critical question in light of the RBI’s new guidelines: Can term deposits be perpetually renewed, and if so, do they ever get classified as unclaimed deposits?
 
Present term deposit policy of banks explained
For instance, a depositor has made a term deposit on, say, 15 February 2012, for a period of three years and the deposit matures for payment on 15 February 2015. On the date of maturity, the depositor has the following three options.
 
a) To close/ redeem the deposit fully on the maturity date and get the proceeds.
 
b) Renew the deposit (matured amount) fully for a further period of his choice.
 
c) Renew part of the maturity amount and get back the balance amount to his savings bank (SB) account
 
Suppose he does not exercise any of the above options, the bank shall renew the deposit automatically for a further period as the original deposit, i.e., three years. The maturity date of the renewed deposit shall be 15 February 2018. This auto-renewal shall continue unless the depositor gives any instruction to the contrary. The deposit shall be again renewed on 15 February 2018, 15 February 2021, 15 February 2024 and so on.
 
Here is an important question
What will happen in the following circumstances? (only illustrative and not exhaustive)
 
a) The depositor has passed away on, say, 1 March 2018? And the nominee or the legal heirs of the depositor had no information about the existence of this deposit and, hence, did not make any claim from the bank.
 
b) A deposit in the name of a minor made by a parent, who forgets and misplaces the deposit receipt.OR the parent passes away without giving details to the minor or guardian.
 
c) Any customer, especially a senior citizen, makes a deposit and forgets/ misplaces the deposit receipt and does not inform anyone in the family.
 
The answer is: The bank shall go on with auto-renewal of the deposit every three years perpetually without any end. The deposit shall never become an overdue deposit and shall never be transferred to the unclaimed deposit/ DEAF.
 
Another consequence to the issue is – If the periodical interest from the same term deposit is getting credited to the savings account of the customer, the SB account also shall never be classified as an inoperative account since the term deposit interest credit is treated as a customer-induced transaction or operation by the customer. In this case, the SB account also shall never be transferred to the unclaimed deposit in the event of the demise of the customer.
 
Clarification from two public sector banks (PSBs) and two private sector banks confirms the following. 
• There is no restriction on the number of times a deposit be auto-renewed if there is no other instruction to the contrary from the depositor.
 
• If the bank is not informed about the depositor’s death, the deposit shall continue to be auto-renewed unless there is a claim from the legal heirs or nominee.
 
The implications for depositors and banks
The intersection of auto-renewal policies and the RBI’s instructions presents a unique scenario. If term deposits are automatically renewed without any customer intervention, they may never reach the status ‘inoperative’ of ‘unclaimed,’ even in the event of the depositor’s demise. This situation could potentially lead to funds remaining within the banking system indefinitely, without reaching the rightful owners or their heirs.
 
A call for clarity and action
The RBI’s initiatives, like the UDGAM portal, are a commendable effort to protect consumer interests and reduce the quantum of unclaimed deposits. However, there is a need for further clarification on how auto-renewal policies align with the new guidelines. Banks may need to revisit their deposit policies to ensure that they do not inadvertently contribute to the perpetuation of unclaimed deposits.
 
Moreover, there is a pressing need for banks to proactively engage with depositors, especially as term deposits approach maturity, to ascertain their intentions and provide guidance on the implications of auto-renewal versus other options.
 
Conclusion
RBI’s consolidated instructions on inoperative accounts and unclaimed deposits mark a pivotal moment in the Indian banking sector’s approach to consumer protection and financial accountability. As the industry navigates these changes, it is imperative for both banks and depositors to remain informed and proactive in managing their financial assets to prevent them from falling into a state of limbo. It is incumbent on the part of the regulator to revisit their directions and plug the loophole which results in perpetual auto-renewal of term deposits by banks without treating them as unclaimed deposits.
 
(Chandramouli Mohan retired as a senior manager from a public sector bank after 38 years of service in various capacities in several places across the country. He has been an RTI and consumer activist since his retirement in March 2020.)
Comments
mahajan.r2016
4 weeks ago
Income Tax Department treats FDs not auto-renewed but issued from maturity amounts as Fresh FDs during the year. It should monitor the net increase in total deposit as FDs.

2. RBI should permit auto-renewal of FDs once only.

3. Depositors should be educated to keep written notes of their deposits including FDs at a secure place known to the family. As far as feasible, they should share these with their nominees.


ca.shyamsundergupta
4 weeks ago
I believe RBI should give a window of 15 days to the depositor to decide about the renewal of the FD for their convenience as was in past, because many time it is not possible to reach bank on the day or earlier day of the maturity for many genuine and practical reasons but the system will renew it by the same period whether it is Sunday or Holiday which cause lot of hardship to the depositors. The problem is very severe if the depositor does not maintain a SB a/c with the bank. This will also break the presumption of the continuity of the account, because it will not be auto renewed. Thereafter the account may be transferred to the inoperative account after the certain period if no one turn to renew and claim the deposit as per the Rules set by the RBI.
abhay1955
4 weeks ago
The concern raised by Mr. Mohan is severe. Long ago, banks used to allow renewal from the due date of the FD if such request was made within 15 days. Beyond 15 days, the effective date would be the date on which the customer approached the bank.

As per my memory works, a bank union approached Indian Banks Association to convince that auto renewal was the proper option to protect interest of the bank depositors, so that they would not lose interest. NKGSB Co-operative bank, just a few years ago, reinstated this process and the FDs are not auto renewed unless there is a specific instruction. The bank offers 15 days period for renewal with effect from the due date.

When we go to create a new FD online or offline, the form specifically asks whether to auto renew the FD or transfer proceeds to account of the depositor on due date. I have experienced this with Bank of Baroda and YES bank.

Also, with the present technology, banks send an SMS to the registered mobile number of the FD holder about the FD which is getting matured. It clearly says that the FD would be renewed on due date for such and such tenure if the holder does not approach the branch before the due date and instructs suitably.

Mr. Mohan has raised three questions a, b and c. This is the area where we need to create awareness among the deposit / account holders. However, due to unique customer number within the branch, all accounts can be viewed once the nominee / legal heir contacts the branch. In all the three cases, if mobile number of the depositor is linked to the customer number, banks will keep on sending SMSs for FDs becoming due. Now there is an increasing practice among banks to issue FD advice instead of FD receipt. While the advice is on a plain paper, the receipt is printed on a security paper. What we can insist upon is to transfer the FD proceeds to the account of the FD holder if there is no specific instruction, instead of auto renewing it.

There is also an issue related to transferring unclaimed deposits to DEAF. MoneyLife is using these funds in the best possible manner in public interest. What is the amount lying in DEAF? Is it audited? Is RBI maintaining proper transparency?
r_ashok41
1 month ago
how to claim back the amount
tenkaraimohan
Replied to r_ashok41 comment 1 month ago
It can be claimed by Nominee or Legal heirs if they know the deposit details. Or else, the bank shall enjoy the funds happily for ever !
trichynandakumar
1 month ago
An eye opener for the customers especially the senior citizens. Well done ????
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