The Reserve Bank of India (RBI) may have upped the minimum amount for offering non-callable Term Deposits (TDs) 6.66 times to ₹1 crore to ensure that retail depositors don’t get lured by additional interest rates offered on these deposits and end up getting penalised when they need to break them in case of emergency.
Further, the central bank may have assessed that banks probably have reached a stage where premature withdrawals below ₹1 crore threshold will not impact them much, say industry experts. A non-callable TD cannot be withdrawn before the maturity date.
The central bank recently reviewed its “Master Direction on Interest Rate on Deposits” with respect to non-callable TDs, whereby it sharply increased the minimum amount for banks to offer non-callable TDs from ₹15 lakh to ₹1 crore.
Consequently, all TDs below ₹1 crore will have premature-withdrawal-facility with effect from October 26, 2023.
The RBI’s new instructions are also applicable for Non-Resident (External) Rupee (NRE) Deposit / Ordinary Non-Resident (NRO) Deposits.
Banking expert V Viswanathan said: “Lured by additional interest (10-20 basis points) on non-callable TDs vis-a-vis callable deposits, some retail customers may lock-in funds in the former, ignoring the possibility of an emergency arising in future. They get penalised heavily in the event of premature withdrawal as the penalty on non-callable TDs is at the discretion of the bank.”
He observed that RBI may have assessed the banking system’s liquidity to have grown to a stage where a bank will not be pinched by sudden/premature withdrawal of deposits up to ₹1 crore per customer.
“Though some banks are facing liquidity deficit, they are still upbeat on lending to unsecured/ credit cards/ microfinance segments due to high net interest margin. They have jacked up savings bank and non-callable TD rates.
“This kind of growth in unsecured portfolio by these banks pushes up call rates. Customers taking unsecured loans are desperate, unmindful of high interest rates. So, Banks’ asset quality could come under stress,” Viswanathan said.
V Rama Chandra Reddy, Head-Treasury, Karur Vysya Bank, said the earlier minimum deposit threshold (of ₹15 lakh) to offer non-callable term deposits to individuals was enabling Banks to design specific products and gave them an LCR (liquidity coverage ratio) advantage. But with the increase in this threshold from ₹15 lakh to ₹1 crore, that scope has been reduced.
LCR ensures that banks hold sufficient reserve of high-quality liquid assets to allow them to survive a period of significant liquidity stress lasting 30 calendar days.