The RBI notification follows an announcement in the sixth bi-monthly monetary policy review in February in which banks were told that they could offer differential interest rates on term deposits based on early withdrawal facility. Photo: Bloomberg
The RBI notification follows an announcement in the sixth bi-monthly monetary policy review in February in which banks were told that they could offer differential interest rates on term deposits based on early withdrawal facility. Photo: Bloomberg

RBI allows banks to offer differential deposit rates

Banks can now offer differential interest rates for deposits above Rs15 lakh, based on whether customers want to withdraw their deposits prematurely

Mumbai: The Reserve Bank of India (RBI) on Thursday allowed banks to offer differential interest rates for fixed deposits above 15 lakh, depending on whether a customer wants to keep the amount till maturity or opts to withdraw it prematurely.

The option should be clearly mentioned to the customer, the RBI said. However, interest rate on fixed deposits below 15 lakh have to be uniform among customers, irrespective of the customer’s choice, the central bank said.

The RBI notification follows an announcement after its monetary policy review meeting in February in which banks were told that they could offer differential interest rates on term deposits based on early withdrawal facility.

“The banks should have a board-approved policy with regard to interest rates on deposits, including deposits with differential rates of interest and ensure that the rates offered are reasonable, consistent, transparent and available for supervisory review as and when required," RBI said.

So far, banks were not allowed to distinguish between customers on the basis of when they want to withdraw their deposits. In 2011, the interest rate on savings bank deposits were freed, allowing banks to offer differential interest rates on these deposits above 1 lakh.

Bankers said the latest RBI directive creates two differences and the impact on deposit rates and the accretion to deposits have to be ascertained.

“There is now a difference between fixed deposits up to 15 lakh and above that amount. Then there is also a different interest rate that banks can charge for these two amounts. We will have to look into how and what kind of product we launch," said Romesh Sobti, managing director and chief executive officer of IndusInd Bank Ltd.

Ashish Parthasarthy, treasurer at HDFC Bank Ltd, said the idea to offer differential rates was a good one because a lot of entities have idle cash, which they like to deploy for a fixed term without withdrawing.

“Logically speaking, banks can offer these entities a higher rate. There are also high net-worth individuals and pensioners who don’t mind keeping large sums for a fixed term. Higher rates will be attractive for them," Parthasarthy said.

So far, banks penalized customers with a reduced interest rate for premature withdrawals. Banks may still continue with these penalties in case of withdrawals.

Shinjini Kumar, executive director, banking and capital markets at PricewaterhouseCoopers, said differential deposit rates offer banks an option to pay higher deposit rates, which will help them compete with other fixed income savings products.

“This will help banks price deposits better," Kumar said.

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