RBI nods to Premature Withdrawal of Deposits

The Reserve Bank of India(RBI) has mandated that banks allow pre-mature withdrawals on all bank deposits up to Rs. 1 crore from now on.

The central bank has increased the minimum limit for ‘non-callable’ fixed deposits from Rs. 15 lakhs to Rs. 1 crore. Previously, the RBI let banks to offer greater interest rates on unbreakable fixed deposits that could not be withdrawn before maturity.

During a rising interest rate regime, banks are incentivized to offer higher deposit rates without a pre-mature withdrawal facility. Non-callable deposits prevent clients from withdrawing funds in the event that interest rates rise.

Customers are encouraged to invest in illiquid, non-callable deposits because they offer a slightly higher interest rate.

Bankers believe that increasing the minimum deposit size on non-callable deposits is intended to protect small investors. Banks provide a 25 to 30 basis point higher return on non-callable FDs.

Higher-value deposits earn a higher rate of return. In a separate statement, the RBI increased the bulk deposit ceiling for rural banks from Rs. 1 lakh to Rs. 1 crore. This means that banks may only provide differential rates on deposits above Rs. 1 crore.