An Empirical study to find out Trend of factors Affecting

Term Deposit with Redemption Risk

Utkarsh Verma
Student ASM’S IIBR

Prof. Priya Tiwari

ASM’S IIBR

ABSTRACT
Redemption risk in term deposit is a relatively new area of research for many
organization including banks. The challenges presented to us was what are the
factors which forces a customer for early withdrawal of his/her term deposit and
how the term deposit redemption rate will vary with those factors. After doing
intensive research on this subject I was able to find out some factor which forces the
customer for early withdrawal like external influence or depositor is in need of
urgent cash requirement. After the factors identification, we were able to depict the
relationship between the influencing factors responsible for customer behavior
towards early withdrawal with the term deposit redemption rate. Like, TDRR (term
deposit redemption rate) would likely to be decrease if ROE increases.

Key words: TDRR (Term deposit redemption rate), unemployment, Return on

equity (ROE).

Introduction

Term Deposit
In simple general words, term deposit is a cash investment held at a financial
institution such as bank, building society or credit union, for an agreed rate of
interest over a fixed amount of time.

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Term deposit is financial instrument provided by banks which provides investors
with a higher rate of interest than a regular savings account, until the given maturity
date. But when the return on term deposit is compared with other riskier financial
instruments such as bonds or stocks, is found out to be less.

Term deposit is generally classified into two types, which are:

 Monthly or Quarterly payout deposit

 Cumulative deposit.

Monthly or Quarterly deposit

In this type of term deposit, Interest will be calculated over a standard fixed rate and
financial institution would be paying interest to customer either on monthly or
quarterly basis, depends upon the type of term deposit a customer has chosen.

Cumulative deposit
Here, the deposit along with interest will be paid after maturity. Under cumulative
deposit, interest is compounded at quarterly intervals i.e. interest earned in a quarter
is included in the principal for calculation of interest in the subsequent quarter. In
simple mathematical terms, here interest would be calculated using compound
interest.

Redemption Risk
Redemption risk or early withdrawal risk is a risk that a depositor withdraws his or
her deposit from an account before the agreed-upon maturity date.

In this study we are going to see what are the factors which forces or makes the
customer to withdraw early before the maturity date of their respective term deposit

Literature Review
James H Gilkeson, John A. List, Craig K. Ruff in Journal of Financial Services
Research 15:2 103-122(1999). In this journal the authors found out that the term
deposits commonly experience early withdrawals. They also find out the why a
person/customer makes early withdrawal of their term deposit when they are in need
of cash.

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Toshihiko TAKEMURA, Takashi KOZU in Eurasian Journal of Business and
Economics 2009, 2 (4), 27-41 . In this journal the author tried to emphasize the
relation between external factors affecting the early withdrawal of term deposit.

Basel committee on Banking supervision in June 2015 (Consultative document).

BCBS (Basel committee on banking supervision) have come up with a framework in
which they mention about the term deposit with redemption risk and how to measure
the TDRR (Term deposit with redemption rate)

Scope of Study
This study will give a overall picture about the factors forcing the customer for early
withdrawal. This report will also educate about how the various factors influence the
redemption rate and how those factors varies with term deposit redemption rate.

Objectives
 To find out the factors which affects the early withdrawal in term deposit

 To study the relation between early withdrawal factors and term deposit
redemption risk.

Research Methodology

In this study we are primarily dealing to find out what are the factors responsible in
forcing the customer for early withdrawal of their term deposit. In this report we will
also be able to find out about how banks can be able to predict the behavior of
customer.

Research Design
In this research, the research design has been used is Review which is consist of
Literature review as well as systematic research.

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Data collection

Primary Data
In this research paper, the primary data have not been used.
Secondary Data
In this study, we went through secondary sources of data, where we found lots of
useful information which were very useful in making this research topic easily
understandable and setting a nice platform to carry out my research.

Tools and Technique

Sample
The sample collected here is purposely, conveniently and unbiased. The sample units
was collected from India over the time period of 2008-2014. The ROE data is of
public sector banks in India and unemployment data is also of India.

Trend Analysis
The analysis of data is been carried out by analyzing it over a period of time and
follow its trend. Hence, I can say that here trend analysis have been used. All the
data have been tabulated and presented in a graphical form.

We have also conducted correlation test in order to find out the relation between the
dependent and independent variable.
The population correlation coefficient ρX,Y between two random
variables X and Y with expected values μX and μY and standard deviations σX and
σY is defined as:

Where cov means covariance , and corr is a widely used alternative notation for the

correlation coefficient.
The Pearson correlation is +1 in the case of a perfect direct (increasing) linear
relationship (correlation), −1 in the case of a perfect decreasing (inverse) linear

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relationship. The closer the coefficient is to either −1 or 1, the stronger the
correlation between the variables.

H1: There is significant relationship between return on equity (ROE) and TDRR.
H2: There is significant relationship between unemployment and TDRR.

NOTE: In our study, we are doing the correlation for each of the variable to show
the relation between both the variable individually. As per the process, first we need
check the correlation between both the variable (independent) and then choose any
one variable if there is any correlation between them. But, in order to see the impact
of independent variable on dependent variable individually, we are not following the
usual process.
In this study, the value for TDRR (Term deposit redemption rate) has been taken
from the Tata Consultancy Services, Siruseri, Chennai.

Data Analysis

As mentioned earlier, the main objective of this research is to find out what factors
could lead to early withdrawal of term deposit by a customer. After doing lots of
research activity, I found out some factors which results in influencing the customers
for a early withdrawal of term deposit.
These principal factors are given as below:

 Financial performance of bank (Return on Equity)

 Urgent cash requirement (Unemployment)

1) Financial Performance of bank

There are many parameters to measure the performance of a bank and I have chosen
Return on equity (ROE).
Return on Equity
Return on equity (ROE) is the amount of net income returned as a percentage
of shareholder’s equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money shareholders have
invested.

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Return on Equity = Net Income/Shareholder's Equity

Higher ROE means financial performance of the enterprise/bank is strong and going
well. Return on equity (ROE) is independent variable and TDRR is dependent
variable. The data have been taken from below link:
https://www.rbi.org.in/Scripts/AnnualReportMainDisplay.aspx

Year ROE (%) TDRR (%)

2008 15.44 3.6
2009 17.94 2.5
2010 17.47 3.3
2011 16.9 4.3
2012 15.33 4.5
2013 13.24 5.1
2014 8.47 5.6

20

15
Rate(%)

10
ROE
TDRR
5

0
2006 2008 2010 2012 2014 2016
Year

Correlation Calculation:

Variabl Observation Minimu Maximu Std.

e s m m Mean deviation
ROE 7 8.470 17.940 14.970 3.276
TDRR 7 2.500 5.600 4.129 1.072

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Correlation Matrix (Pearson)
Variable
s ROE TDRR
ROE 1 -0.851
TDRR -0.851 1

Interpretation

As per Trend Analysis: ROE is a measure of efficiency. Here we are trying to find
out the relation between TDRR and ROE. In this study we found out that As ROE is
getting decreases continuously, Redemption rate is increasing.
As per correlation coefficient: The correlation coefficient between TDRR and ROE
is -0.851, which proves that there is strong downhill (negative) relationship.

2) Urgent Cash Requirement

In this case the depositor is having two scenarios either he/she can borrow the money
from bank or early withdrawal of their term deposit. But, he/she will definitely go
with early withdrawal options as the borrowing rate (loan) is much higher than term
deposit rate. The underlying key factor is:
 Temporary/Permanent Unemployment

Unemployment
Unemployment is also an important factor which forces the customer for early
withdrawal of term deposit. Unemployment creates lack of cash scenario which
makes the depositor to withdraw early.
The data have been taken from below link:
http://www.tradingeconomics.com/india/unemployment-rate

Year Unemployment TDRR

2008 8.7 3.6
2009 9.4 2.5
2010 9.4 3.3
2011 6.5 4.3
2012 5.2 4.5
2013 4.9 5.1

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 2014 4.2 5.6

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Rate(%)

4 Unemployment
TDRR
2

0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Year

Correlation Calculation:

Observation Minimu Maximu Std.

Variable s m m Mean deviation
Unemploymen
t 7 4.200 9.400 6.900 2.239
TDRR 7 2.500 5.600 4.129 1.072

Correlation Matrix (Pearson)

Unemployme
Variables nt TDRR
Unemployme
nt 1 -0.952
TDRR -0.952 1

Interpretation
As per Trend analysis: Here we are trying to find out the relation between TDRR
and ROE. In this study we found out that As Unemployment is getting decreases
continuously, Redemption rate is increasing.
As per Correlation coefficient: The correlation coefficient between TDRR and
Unemployment is -0.952, which proves that there is strong downhill (negative)
relationship.

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Finding

 In this research paper we found out the factors which are responsible for the
early withdrawal of term deposit. Those factors are financial performance of
bank which includes return on equity and urgent cash requirement which
include unemployment.
 We have been able to successfully identify the correlation between ROE and
TDRR, which came out to be inversely proportional.
 We have identified relationship between unemployment and TDRR and it
comes out to be inversely proportional.

Conclusion

After conducting this study we are able to identified the behavioral aspects of
consumer that is to identify those factors which can force a customer to early
withdraw his/her term deposit. After conducting this study we can say that, we have
successfully identified some of those factors which can forces a customer for early
withdrawal. The primary factors are given as below:
▪ Financial reinvestment
▪ Urgent cash requirement

We also find out the relation between TDRR and ROE, and also between TDRR and
unemployment

References:

http://www.bis.org/bcbs/publ/d368.pdf

http://www.bis.org/bcbs/publ/d319.pdf

http://home.uchicago.edu/jlist/papers/10-fulltext.pdf

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http://www.ejbe.org/EJBE2009Vol02No04p27TAKEMURA-KOZU.pdf

http://www.tradingeconomics.com/india/unemployment-rate

https://www.rbi.org.in/Scripts/AnnualReportMainDisplay.aspx

http://jfbmnet.com/journals/jfbm/Vol_2_No_2_June_2014/1.pdf

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