RBI Regulations: Interest on deposit accounts

This post elucidates how interest rates offered by banks may vary based on the tenor of deposits, the Periodicity of interest payable on SB accounts, accounts frozen by enforcement authorities, and floating deposits. Additional rate of interest paid by banks in certain cases, interest payable on NRE and FCNR (B) deposits, rules regarding interest payable on overdue deposits, death of the deposit holder, premature closure of deposits, etc.

Residents and non-resident Indians can keep deposits in banks. A domestic rupee account may be opened as a current, savings, or term deposit. The interest rate payable both on Savings Bank Accounts and term deposits depends on the bank where it is deposited. Current accounts are non-interest-bearing deposits i.e. banks do not pay interest on deposits held in the current account in terms of RBI regulations.

The interest rate paid by a bank on an SB account or term deposit to a customer depends on the bank where it is deposited. This is because, with effect from October 22, 1997, RBI has given the freedom to commercial banks to fix their own interest rates on domestic term deposits of various maturities with the prior approval of their respective Board of Directors/Asset Liability Management Committee (ALCO). The interest rate on savings bank accounts too, has been deregulated with effect from October 25, 2011.

Regulations for payment of interest on bank deposits:

RBI issues directives to commercial banks in India from time to time on Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO), and Non-Resident (External) (NRE) Accounts. According to RBI directions, no bank should (a) pay interest on Current Account save as provided in RBI master direction from time to time. (b) pay countervailing interest on any current accounts maintained with it by its borrowers; (c) discriminate in the matter of interest paid on deposits, between one deposit and another, accepted on the same date and for the same maturity, whether such deposits are accepted at the same office or different offices of the bank, except in respect of fixed deposit schemes specifically for resident Indian senior citizens offering higher and fixed rates of interest as compared to normal deposits of any size, and single term deposits of Rupees fifteen lakh and above on which varying rates of interest may be permitted based on the size of deposits. The permission to offer varying rates of interest is subject to the following conditions:

Interest Payable on SB accounts:

The interest on SB shall be calculated on a daily product basis. Interest on savings deposits shall be credited at quarterly or shorter intervals. Interest on savings bank accounts, including those frozen by the enforcement authorities, shall be credited regularly.

Varying rate of interest on deposits:

The permission to offer varying rates of interest for deposits of the same maturity applies to single-term deposits of Rupees fifteen lakh and above. Banks should, therefore, offer the same rate of interest or different rates of interest for deposits of Rupees fifteen lakh and above. For deposits below Rupees fifteen lakh of the same maturity, the same rate will apply. In this regard, it is clarified that it will not be for banks to offer higher/differential rates of interest, as compared to other deposits of similar tenure, on deposit schemes framed by them based on the Bank Term Deposit Scheme, 2006, announced by Government of India vide their notification No. 203/2006 dated July 28, 2006. It will also not be for banks to offer higher/ differential rates of interest on deposits received under the Capital Gains Accounts Scheme, 1988.

According to RBI directions, all transactions, involving payment of interest on deposits shall be rounded off to the nearest rupee for rupee deposits and to two decimal places for FCNR (B) deposits.

 Interest payments on FCNR (B) and NRE accounts:

No bank shall accept or renew FCNR (B) deposits over five years and no recurring deposits shall be accepted under the FCNR (B) Scheme. Currently, the overnight alternative reference rate (ARR) for the applicable currency/swap plus 250 basis points for deposits with maturities of 1 year to less than 3 years and overnight ARR plus 350 basis points for deposits with maturities of 3 years and above and up to 5 years are the maximum interest rates that can be levied on foreign currency non-resident bank (FCNRB) deposits. Scheduled Commercial Banks shall, at their discretion, decide the currency-wise minimum quantum on which differential rates of interest may be offered.  However, the interest rates on all deposits, including where differential rates of interest are offered, shall be subject to the overall ceiling prescribed on FCNR(B) deposits.

 Interest rates on NRE deposits must not be higher than those provided by the banks on equivalent domestic rupee term deposits, according to prevailing guidelines.

During 2022, with effect from July 7, 2022, RBI temporarily permitted banks to raise fresh FCNR (B) and NRE deposits without reference to the extant regulations on interest rates. This relaxation was available for the period up to October 31, 2022.

Interest on floating-rate deposits:

As per RBI guidance, interest on floating-rate deposits shall be paid within the swap rate limitation for the relevant currency and maturity, and interest on fixed-rate deposits must be paid within the Overnight Alternative Reference Rate (OARR) cap for the relevant currency and timeframe. The basis for determining the maximum rates for the interest rates offered with effect in the following month is the Overnight Alternative Reference Rate for the relevant currency/SWAP rates as of the last working day of the preceding month. To determine the interest rates on FCNR (B) deposits, the Overnight Alternative Reference Rate for the relevant currency / Swap rates cited by the Foreign Exchange Dealers Association of India (FEDAI) shall be utilised as the reference. The interest reset period shall be six months for all floating rate deposits.

Interest rates on deposits may vary for certain reasons:

As per section 4 of Master Directions 2016 interest rates on term deposits shall vary only on account of one or more of the following reasons (i) Tenor of Deposits:(ii) Size of Deposits (iii) Non- Non-availability of Premature withdrawal option. In this case, all term deposits accepted from individuals (held singly or jointly) for the amount of Rupees fifteen lakh and below shall have the premature-withdrawal facility.

Payment of Interest on pre-mature withdrawal:

The interest rates applicable are not at the contracted rate on term deposits withdrawn before the maturity date the deposit remained with the bank.

 Payment of Additional Interest on domestic deposits:

(a) Scheduled Commercial Banks shall, at their discretion, allow additional interest of one percent per annum, over and above the rate of interest mentioned in the schedule of interest rates on savings or term deposits of the bank’s staff and their exclusive associations as well as on deposits of Chairman, Chairman & Managing Director, Executive Director or such other Executives appointed for a fixed tenure, subject to the following conditions:

(i) The additional interest is payable till the person continues to be eligible for the same and in case he ceases to be so eligible, till the maturity of a term deposit account.

(ii) In case of employees who are taken over under the scheme of amalgamation, the additional interest is allowed only if the interest at the contractual rate together with the additional interest does not exceed the rate, which could have been allowed if such employees were originally employed by the bank.

(iii) In the case of employees taken on deputation from another bank, the bank from which they are deputed may allow additional interest in respect of the savings or term deposit account opened with it during the period of deputation.

(iv)In the case of persons taken on deputation for a fixed tenure or on a contract of a fixed tenure, the benefit will cease to accrue on the expiry of the term of deputation or contract, as the case may be.

(v) Bank Employees’ Federations, in which bank employees are not direct members, shall not be eligible for additional interest.

(vi) The additional interest may be paid on the following deposits after obtaining a declaration from the depositor concerned, that the monies deposited or which may be deposited from time to time into such account belong to the depositor:

(a) member or a retired member of the bank’s staff, either singly or jointly with any member or members of his/her family; or

(b) the spouse of a deceased member or a deceased retired member of the bank’s staff; and

(c) an Association or a fund, members of which are members of the bank’s staff; led Commercial Banks shall, at their discretion, formulate term deposit schemes specifically for resident Indian senior citizens, offering higher and fixed rates of interest as compared to normal deposits of any size.

Provided that this facility is not offered on the term deposit standing in the name of a HUF or the Karta of the Hindu Undivided Family (HUF), even if the Karta is a resident Indian senior citizen.

Additional Interest to Retired Staff:

Scheduled Commercial Banks shall, at their discretion, give their resident Indian retired staff, who are senior citizens, the benefit of additional interest rates as admissible to senior citizens over and above the additional interest payable to them by their being retired members of the banks’ staff. No. Children (including minors) are not eligible for additional interest admissible to banks’ staff members/ retired staff members.

Additional interest on deposits for Army, Navy, and Air-force Insurance Funds:

 A Public Sector Bank is permitted to pay additional interest of 1.28 percent per annum over and above the normal rate of interest permissible in terms of directives on interest rates on deposits issued by the Reserve Bank of India, from time to time, only on the term deposits for two years and above of Army Group Insurance Directorate (AGID), Naval Group Insurance Fund (NGIF) and Air-Force Group Insurance Society (AFGIS), provided such deposits are not in any way linked with payment of insurance premia by the bank.

 Interest on overdue domestic deposits:

All aspects concerning the renewal of overdue deposits may be decided by individual banks subject to their Board laying down a transparent policy in this regard and the customers being notified of the terms and conditions of renewal, including interest rate, at the time of acceptance of the deposit. The policy should be non-discretionary and non-discriminatory.

It is a normal practice in public sector banks that if a Term Deposit (TD) matures and proceeds are unpaid, the amount left unclaimed with the bank shall attract the rate of interest as applicable to the savings account or the contracted rate of interest on the matured TD, whichever is lower. If, after renewal, the deposit is withdrawn before completion of the minimum stipulated period under the scheme, scheduled commercial banks may, at their discretion, recover the interest paid for the overdue period i.e. period beyond the original date of maturity.

Interest paid Overdue FCNR (B) deposits:

A bank may, at its discretion, renew an overdue FCNR (B) deposit or a portion thereof provided the overdue period from the date of maturity till the date of renewal (both days inclusive), does not exceed 14 days and the rate of interest payable on the amount of the deposit so renewed shall be the appropriate rate of interest for the period of renewal as prevailing on the date of maturity or on the date when the depositor seeks renewal, whichever is lower. In the case of overdue deposits where the overdue period exceeds 14 days, the deposits can be renewed at the prevailing rate of interest on the date when the renewal is sought. Suppose, the depositor places the entire amount of the overdue deposit or a portion thereof as a fresh FCNR(B) deposit, banks may fix their own interest for the overdue period on the amount so placed as a fresh term deposit. Banks are free to recover the interest so paid for the overdue period if the deposit is withdrawn after renewal before completion of the minimum stipulated period under the scheme.

 Interest payable on the domestic deposit account of a deceased depositor

The rate of interest on matured deposits standing in the name of a deceased individual depositor, or two or more joint depositors, where one of the depositors has died, shall be subject to the conditions laid down in section 4 of these Directions. In case the claimants of an NRE term deposit account of a deceased depositor are residents, the deposit on maturity shall be treated as a domestic rupee term deposit and interest shall be paid for the subsequent period at a rate applicable to a domestic term deposit of similar maturity.

In the case of a term deposit standing in the name/s of a deceased individual depositor, or two or more joint depositors, where one of the depositors has died, the criterion for payment of interest on matured deposits in the event of death of the depositor in the above cases has been left to the discretion of individual banks subject to their Board laying down a transparent policy in this regard.

 In the case of balances lying in a current account standing in the name of a deceased individual depositor/ sole proprietorship concern, interest should be paid only from May 1, 1983, or from the date of death of the depositor, whichever is later, till the date of repayment to the claimant/s at the rate of interest applicable to savings deposits as on the date of payment. However, in the case of NRE deposits, if the claimants are residents, the deposit on maturity is treated as a domestic rupee deposit and interest is paid for the subsequent period at the rate applicable to domestic deposits of similar maturity.

Term Deposit Accounts of customers frozen by the orders of the enforcement authorities:

A request letter may be obtained from the customer on maturity. While obtaining the request letter from the depositor for renewal, banks should also advise him to indicate the term for which the deposit is to be renewed. In case the depositor does not exercise his option of choosing the term for renewal, banks may renew the same for a term equal to the original term.

No new receipt is required to be issued. However, a suitable note should be made regarding renewal in the deposit ledger.

The renewal of the deposit should be advised by a registered letter/speed post/courier service to the concerned government department under the advice of the depositor. In the advice to the depositor, the rate of interest at which the deposit is renewed should also be mentioned.

If the overdue period does not exceed 14 days on the date of receipt of the request letter, renewal should be done from the date of maturity. If it exceeds 14 days, banks should pay interest for the overdue period as per the policy adopted by them, and keep it in a separate interest-free sub-account which should be released when the original fixed deposit is released.

Further, regarding the savings bank accounts frozen by the enforcement authorities, banks should continue to credit the interest to the account regularly.

Master Direction – Reserve Bank of India (Interest Rate on Deposits) Directions 2016

(a) In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them below:

(i) “Bulk Deposit” means, (i) Single Rupee term deposits of Rupees two crore and above for Scheduled Commercial Banks (excluding Regional Rural Banks) and Small Finance Banks.

(ii) Single Rupee term deposits of Rupees fifteen lakhs and above for RRBs.  (a) There shall be a comprehensive policy on interest rates on deposits duly approved by the Board of Directors or any committee of the Board to which powers have been delegated.

(b) The rates shall be uniform across all branches and for all customers and there

shall be no discrimination in the matter of interest paid on the deposits, between one deposit and another of a similar amount, accepted on the same date, at any of its offices.

(c) Interest rates payable on deposits shall be strictly as per the schedule of interest rates disclosed in advance. The banks shall maintain the bulk deposit interest rate card in their Core banking system to facilitate supervisory review.

(d) The rates shall not be subject to negotiation between the depositors and the bank.

(e) The interest rates offered shall be reasonable, consistent, transparent, and available for supervisory review/scrutiny as and when required.

(f) All transactions, involving payment of interest on deposits shall be rounded off to the nearest rupee for rupee deposits and to two decimal places for FCNR (B) deposits.

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