Tight Rights

The Reserve Bank of India (RBI) is planning to allow banks to introduce a deposit scheme whereby they can exercise a put and call option with their depositors. This will enable banks to hedge against interest rate risks, especially at the time of falling rates.

Senior officials at the apex bank met treasury heads of leading public and private sector banks recently to get their feedback on the proposed flexi-deposit scheme. Banks have indicated that the structure of the scheme should be left to them.

The benefits from the proposed scheme can be seen in a situation where a depositor opts for a three-year deposit scheme at 12 per cent and the rates see a steep fall to 10 per cent.

 

Under the new scheme, banks could exercise the call option and thus reduce the cost of funds. Currently, only depositors enjoy the flexibility of premature deposit withdrawal. Thus, during a rising interest rates scenario, they can withdraw deposits and start a fresh scheme at the higher interest rate.

Sources said the new scheme, which likely to be termed flexi-deposit scheme, is likely to be initially permitted only for one-year fixed deposits. The scheme is expected to have a lock-in period of a minimum of 15 days. However, it would be left to each bank to structure the details of the schemes to suit their requirements. It is also aimed at providing banks with the flexibility to adjust their assets against liabilities.

The scheme is primarily aimed at high net worth individuals and big corporates who keep their surplus with banks as fixed deposits. "Often big accounts see premature withdrawal when the rates are rising and such deposits turn out to be very expensive when interest rates are falling. The new scheme would allow banks to hedge