Banks unlikely to offer more than 25-50 bps on non-callable deposits

Non -callable deposits are those where premature withdrawal is not allowed

You will soon be able to earn a higher interest rate on deposits that you agree not to withdraw before the term ends, says a recent Reserve Bank of India directive. However, it is likely the rate might not be high.

“It is unlikely that the non-callable deposits will earn more than 25 basis points (extra). In the best case scenario, if a bank really wants to correct its asset liability management profile, it will be willing to offer a slightly higher rate of interest but even in that case, it won’t be more than 50 basis points (bps),” said the retail head of a private sector bank.

Non–callable deposits are where premature withdrawal is not allowed. Earlier this month, in the bi-monthly policy review, RBI said it planned to introduce "callability" as a distinguishing feature for a bank fixed deposit (FD), where lenders will be allowed to offer a differential rate of interest.  

Banks are not so enthused. “Customers might not rush into non-callable deposits. If deposit rates are on their way down, it isn’t meaningful for them to go for it right now. The differential rates can be applied but at this juncture, banks are less likely to offer that premium. Why would they pay higher when customers will go for those deposits where the rates are going to be higher in the near future?” asked Paresh Sukthankar, deputy managing director, HDFC Bank, in a media conference call.

Bankers also say the non-callable deposits will be for a longer tenure. Currently, banks offer a different rate of interest based on the tenor of deposits in case the amount is less than Rs 1 crore. Five-year FDs which are tax-free are the only ones that cannot be withdrawn at present before the end of the term.

Another reason bankers express unwillingness at offering a high rate of interest is because they believe RBI might allow withdrawal even in the non-callable deposit, albeit with a penalty. “Earlier, too, premature withdrawals were not allowed.

However, RBI said banks can’t cause depositors hardship by not allowing them access to the money in case of need. We fear that after a year or so something similar might happen and, therefore, it makes no sense to price the product at a very high premium as compared to the existing FDs,” said another banker.  

RBI has said premature withdrawal of deposits result in asset-liability management issues, especially under the Liquidity Coverage Ratio requirement under the Basel-III framework. So, it has proposed non-callable deposits.