The Reserve Bank of India (RBI) has significantly raised the minimum amount required for offering non-callable Term Deposits (TDs) to Rs 1 crore. This move may help prevent retail depositors from being enticed by the higher interest rates offered on these deposits, which could lead to penalties in cases of emergency withdrawals.
The RBI’s decision comes after assessing that banks have reached a point where premature withdrawals below the Rs 1 crore threshold would not significantly impact their operations. Non-callable TDs are term deposits that cannot be withdrawn before the maturity date.
This revision in policy means that all TDs below Rs 1 crore will now have the option for premature withdrawal, starting from October 26, 2023. These changes also apply to Non-Resident (External) Rupee (NRE) Deposit and Ordinary Non-Resident (NRO) Deposits.
The RBI’s aim is to discourage retail customers from locking their funds in non-callable TDs due to slightly higher interest rates (typically 10-20 basis points) compared to callable deposits. Premature withdrawal from non-callable TDs can incur heavy penalties, which are determined at the bank’s discretion.
Ample liquidity
Banking experts suggest that the RBI’s decision reflects its confidence in the banking system’s liquidity, which can absorb premature withdrawals of deposits up to Rs 1 crore per customer. While some banks may face liquidity challenges, they are still enthusiastic about lending to unsecured, credit card, and microfinance segments due to high net interest margins. These banks have raised savings bank and non-callable TD rates to attract more deposits.
This growth in unsecured lending portfolios could lead to higher call rates, as customers seeking unsecured loans may be less concerned about high interest rates. As a result, banks’ asset quality could come under stress due to the increased risk associated with unsecured lending.
Previously, the Rs 15 lakh threshold for offering non-callable term deposits allowed banks to create specific products and provided them with a Liquidity Coverage Ratio (LCR) advantage. However, with the minimum deposit threshold now raised to Rs 1 crore, this advantage has been reduced. The LCR is a measure to ensure that banks maintain an adequate reserve of high-quality liquid assets to withstand a period of significant liquidity stress lasting 30 calendar days.
