Different deposit rates for those who want to withdraw prematurely

Those looking to invest overseas can send more money abroad

Premature withdrawal of bank fixed deposits (FDs) may now come at a price. The Reserve Bank of India (RBI) is planning to introduce "callability" as a distinguishing feature for bank FDs and banks will be allowed to offer differential rates on deposits which have this feature. RBI will issue detailed guidelines later.

Currently, for retail FDs (deposits of up to Rs 1 crore), interest rates differ based on the tenor or period of maturity. But once the callability feature is introduced, banks will be allowed to offer differential rates even on the basis of callability, RBI said.

"...All deposits accepted from individuals and Hindu undivided family (HUF) up to Rs 1 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. It is, therefore, proposed to allow non-callable deposits. Callability in a deposit will then be a distinguishing feature for offering differential rates on interest on deposits," RBI said.

According to the head of retail of a public sector bank, based on RBI's statement, going ahead there could be a type of deposit, where premature withdrawal will not be allowed. And as compensation for this banks may offer a higher interest rate.

For most banks, the penalty for premature withdrawal of deposits is 0.5 to 1 per cent below the contracted rate or the rate applicable for the period the deposit has remained with the bank.

According to Suresh Sadagopan, founder of Ladder7 Financial Advisories, doing away with the premature withdrawal facility will bring bank FDs in direct competition with company deposits which offer rates, but also charge higher penalties for premature withdrawal.

In another move, which could bring some cheer to investors looking to invest overseas, RBI increased the limit under the Liberalised Remittance Scheme from the existing $125,000 to $250,000 per person per year. This means, one can now remit more money overseas.

Under the LRS, resident Indians can invest in equity shares, units of mutual funds, venture funds, debt instruments, unrated debt securities, promissory notes, and real estate. Residents can also maintain foreign currency accounts with banks outside India for carrying out transactions under the scheme. People also send money overseas for children's education and medical treatment.