Autosweep SB account: How good is it?

The savings bank accounts with some of the Indian banks nowadays come with an auto-sweep facility. This added facility makes it convenient for an account holder to transfer excess cash in his/her savings account to an FD account and vice versa. Convenient it is, but is it also better in terms of returns on the deposits? To find an answer to this question, one needs to know how the auto-sweep facility works.

A savings bank (SB) account with an auto-sweep facility comes with a threshold limit which can be anywhere between Rs 25,000 to Rs 1 lakh. Any amount in excess of this threshold limit is automatically transferred to a FD account having a maturity period as decided by the bank.

The auto-sweep facility also works in reverse. Here, the bank specifies the minimum balance to be maintained in the SB account and any shortfall in minimum balance is made up by transferring requisite amount of money from the FD account to the SB account. 

The auto-sweep facility provides higher returns if the excess amount in SB account is transferred to FD account regularly as the interest earned on FD account with a maturity period of one year or more is much higher than the interest earned on SB account. This facility is suitable for those who can maintain financial discipline and save regularly so that their bank can sweep in funds from their SB account to FD account on a regular basis and they can earn interest rate which is higher than SB account.

However, if the account holder frequently and prematurely withdraws funds from the FD account to maintain minimum balance in the SB account, then the returns on FD account may dip below the returns on the SB account. This is because frequent withdrawals from FD account (before maturity date) entail loss of interest in the form of lower interest rate (depending on the number of days the amount was in the FD account). That apart, the bank imposes a penalty of 0.5%-1% on premature withdrawal of FD, which further erodes the return on FD account. For such accountholders, the SB account may provide better returns than the unstable FD account.