Bank Deposits: Features of deposits with and without-premature-withdrawal facility

Currently, banks are allowed to offer differential rates of interest on deposits on the basis of tenor for deposits less than  ₹ One crore and on the basis of quantum for deposits of ₹ One crore and above. Banks are, however, not permitted to differentiate on the basis of any other parameter of the deposit contract. Besides, all deposits accepted from individuals and Hindu undivided family (HUF) up to  Rs. one crore are callable i.e., have the facility of premature withdrawal. This results in asset-liability management issues, especially under the Liquidity Coverage Ratio (LCR) requirement under the Basel III framework. Therefore in the sixth Bimonthly Monetary Policy Statement- 2014-15 (announced on February 3, 2015) it was proposed to allow non-callable deposits. In this regard the latest circular of RBI  (RBI/2014-15/554 DBR.No.Dir.BC.87/13.03.00/2014-15 dated 16.04.2015) gives the details on distinguishing features for offering differential rate of interest on  term deposits.

According to the new guidelines banks will have the discretion to offer differential interest rates based on whether the term deposits are with or without-premature-withdrawal-facility subject to the following guidelines:

All term deposits of individuals (held singly or jointly) of ₹ 15 lakh and below should, necessarily, have premature withdrawal facility.In case of all term deposits other than deposits of individuals of ₹ 15 lakh and below, banks can offer deposits without the option of premature withdrawal as well.

However, banks that offer such term deposits should ensure that at the customer interface point the customers are, in fact, given the option to choose between term deposits either with or without premature withdrawal facility.

Banks should disclose in advance the schedule of interest rates payable on deposits i.e. all deposits mobilized by banks should be strictly in conformity with the published schedule.