Hybrid Deposits or Flexi Deposits or MULTI OPTION DEPOSIT SCHEME (MODS) are a combination of demand and fixed deposits, invented for meeting customer’s financial needs in a flexible manner. Many banks had introduced this new deposit product some years ago to attract the bulk deposits from individuals with high net- worth. The increasing competition and computerization of banking has facilitated the proliferation of this product in several other banks in the recent past. Banks have given their own brand names to such deposits e.g. Quantum Deposit Scheme of ICICI Bank, Multi Option Deposit Scheme (MODS) of SBI.
The flexi deposits show a fusion of demand and fixed deposits as reflected from the following features of the product:
♦ Only one savings/current account (Current Premium account or Savings Bank Premium a/c as already is opened and the term deposits issued under the scheme are recorded only on the bank’s books as no term deposit receipts are issued to the customer. However, the term deposits issuance and payment particulars would be reflected in the statement of the savings/current account for customer’s information/record.
♦ Once the quantum of deposits in savings/current account crosses a pre-agreed level, such surplus amount is automatically transferred to the term deposit account of a pre-determined maturity (usually one- year) in the customer’s name for increasing the interest earning.
♦ In the event of a shortfall in the current/savings account, the cheques drawn on the account are honoured by automatically transferring back the required amount to the savings/current account from the fixed deposit account (reverse sweep). In such a case, the term deposit is broken and the amount of the reverse sweep earns lower interest rate due to the pre-mature payment of that portion of the term deposit. However, the remaining amount of the term deposit continues to earn the original interest rate.
Main Advantages of Flexi-Deposits
♦ Advantage of Convenience: The customer opens only one account (savings or current) under the scheme and need not come to the bank branch each time for opening term deposit accounts or for pre- paying/ breaking term deposit for meeting the shortfall in the savings /current account.
♦ Advantage of Higher Interest Earning: The customer earns higher interest on his surplus funds than is possible when he opens two separate accounts: savings and term deposits.
♦ Withdrawals through ATMs can also be conveniently made.
Example
- Karan has opened a savings account with Bank XYZ which is offering the auto sweep facility. Karan deposits Rs 47000 in his account.
- The bank has provision of keep a minimum of Rs 5000 in the savings account and thereafter remaining money is transferred to fixed deposits in multiples of Rs 5000.
- So in this case Rs 7000 will be kept in the savings account and the remaining amount of Rs 40,000 will transferred to 8 fixed deposits of Rs 5000 each.
- Now suppose one day Karan withdraws Rs 13000 from an ATM. In this transaction the bank ATM will disburse the Rs 7000 lying in the savings account and 3 FDs of Rs 5000 each (total Rs 15000) will be broken and the bank ATM will disburse the remaining Rs 6000 (Total withdrawal amount Rs 13000 = Rs 7000 + Rs 6000) and leave the remaining Rs 9000 (FD amount Rs 15000 – remaining withdrawal amount of Rs 6000) in the savings account.
- So now after the withdrawal of Rs 13000 now Karan will be left with 5 FDs of Rs 5000 each.
- After the entire transaction Karan’s balance will be reduced to Rs 34,000 (Initial deposit amount Rs 47000 – Withdrawal amount Rs 13000) out of which Rs 9,000 will be in the savings account and remaining Rs 25000 will in 5 fixed deposits of Rs 5000 each.
- In auto sweep facility whenever account linked FDs are broken the FDs are broken following the Last In First Out (LIFO) rule. This means the latest FD that was last made will be broken first. The below diagram explains how the flexi deposit account will work in Karan’s example.
