High value FDs to earn higher rate; norms to be issued soon: RBI

Unbreakable high value fixed deposits will soon earn higher rate of interest with the Reserve Bank of India allowing banks to offer differential rates.

The higher interest rate will be payable only to fix deposits of over Rs 1 crore by individuals with no option of pre-mature withdrawal.

The Reserve Bank has, however, not specified the minimum tenure of FDs which will be eligible for higher rate of interest.

RBI said that the detailed guidelines on differential rate of interest will be issued soon.

"Definitely, banks would offer higher rate of interest as they would get bulk deposit of fixed tenure which will help them in better management of asset liability position," a senior banker said.

"How high would be interest rate compared to callable deposits and what would be the tenure would be something decided by the RBI when they issue detailed guidelines in this respect," the official said, adding, it could be 0.5 per cent higher also.

As per the existing rules, all deposits accepted from individuals and Hindu undivided family (HUF) up to Rs 1 crore are callable, that is having 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," RBI's monetary policy review said.

"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. Detailed guidelines will follow shortly," it said.

Commenting on this development ICICI Bank CEO and Managing Director Chanda Kochhar said the introduction of differential rate structures for non-callable deposits will help banks in asset-liability management.

Currently, banks are allowed to offer differential rates of interest on deposits on the basis of tenor for deposits of less than Rs 1 crore and on the basis of quantum for deposits of Rs 1 crore and above.

Banks are, however, not permitted to differentiate on the basis of any other parameter of the deposit contract.