Tradable Fixed Deposits

The very thought of investment in India means a Fixed deposit in a Bank. They provide a secure way of returns. All the fixed deposits in banks are guranteed by a wing of RBI(Dont remember the name right now). So there is no risk like return of investments.

All the banks are free to price (rate of interest) their fixed deposits as per their liking and demand. Generally they are in the range of 7-10%.

But there are many flaws in these systems. One of them is the liquidity. All these FD's are not liquid. These FD's are not transferable. They dont have a market.

So if you need money now and not a year later, you cannot trade them. Also if another bank is offering better rates, you cannot switch. The person has to go to banks and sold these FD back to the bank at a penalty. The penalty is around 2% of the amount deposited.

This is also a problem if you have kept deposit as hedge against a loan. This is due to deposit being on fixed interest rate and loan on floating rate. When the RBI changes the key interest rates (mostly upwards due to inflation) the gap between both the rates also increases.
The other problem is tenure. You cannot get a Fixed deposit of the tenure you want. Suppose you have payout after 7 months and no bank is willing to offer the tenure you want. Either you have to keep the money in your safe or do multiple transactions.

Now whats the solution for this. One of them is to make these FD's transferable. other is to create a market for fixed deposits for trading. As all these deposits are secured there is no default risk. These FD's can be considered bonds with interest rate payments as its coupon. Based on the current market, the value of this FD's would fluctuate. For example, during the time of interest rate hardening, a bank issued 9% FD. That FD is now listed in market at 9% discount. Now with easing of market, the same bank is issuing 8% FD. Obviously the 9% FD would fetch higher value due to higher interest rate.

Advantages:
Depositor: Would not be paying penalty on breaking of FD. Switch easily to get better returns. Market available to depositor. Deposit of his tenure available.

Trader: Deposit of his tenure available. Easily turn to FD if equity markets are giving better returns. Market Makers.

Market: Keep track of who is holding the FD. Keep track of transactions.

Bank: Would not have to worry about early payment on FD's. Just have to pay interest to the person holding the coupon. No need to worry who is holding the FD.

Disadvantages:

Bank: They would loose the penalty.

What do you think of this concept. Give your concerns and queries in the comment section.