Ever wondered why banks introduced Fixed Deposits? What benefit do they draw from imply keeping your money for a fixed period and then returning it with a handsome return?
There’s a simple financial explanation to this. When you put money in your current or savings bank account, you can withdraw it anytime. But, if all the funds keep floating at customer’s discretion, then how will the bank find money to carry out processes such as giving out loans? That’s why there’s a need for deposits with a fixed tenure, aka Fixed Deposits or FDs. In return for blocking the customers’ funds for a longer duration, banks give a higher rate of interest compared to other deposits.
This quid pro quo is also utilised by company fixed deposits in India. Whenever a company needs funds, it has several means of raising them from the market. If it went to institutional lenders, they would ask for a higher interest rate. If it, on the other hand, goes to the bank customers with its Company Fixed Deposit instead, it will only have to pay them slightly higher than their bank FDs, which would still be lower than what the company would’ve had to pay the institutions. So, it’s a win-win situation!
There is one more reason why it’s called a ‘Company Fixed Deposit’. The interest rate remains fixed throughout the tenure. The fluctuation in bank rates does not impact the rate of return on FDs. From the very beginning, a customer knows how much interest the Principal amount will earn at the end of the tenure.
There’s a simple financial explanation to this. When you put money in your current or savings bank account, you can withdraw it anytime. But, if all the funds keep floating at customer’s discretion, then how will the bank find money to carry out processes such as giving out loans? That’s why there’s a need for deposits with a fixed tenure, aka Fixed Deposits or FDs. In return for blocking the customers’ funds for a longer duration, banks give a higher rate of interest compared to other deposits.
This quid pro quo is also utilised by company fixed deposits in India. Whenever a company needs funds, it has several means of raising them from the market. If it went to institutional lenders, they would ask for a higher interest rate. If it, on the other hand, goes to the bank customers with its Company Fixed Deposit instead, it will only have to pay them slightly higher than their bank FDs, which would still be lower than what the company would’ve had to pay the institutions. So, it’s a win-win situation!
There is one more reason why it’s called a ‘Company Fixed Deposit’. The interest rate remains fixed throughout the tenure. The fluctuation in bank rates does not impact the rate of return on FDs. From the very beginning, a customer knows how much interest the Principal amount will earn at the end of the tenure.
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