RBI’s New Guidelines on Non-Callable Deposits

Narendra Kumar

30 Oct, 2023

On October 26, 2023, the Reserve Bank of India (RBI) issued a significant notification RBI/2023-24/74, fundamentally altering the landscape of non-callable deposits in India. This notification, referred to as “Non-Callable Deposits – Master Direction on Interest Rate on Deposits”, comes with far-reaching consequences for investors, banks, and the overall financial stability and attractiveness of banking products.

Understanding the depth and nuances of this notification, and how it reshapes the relationship between banks, their customers, and their investment approaches, is crucial for stakeholders at all levels.

Essence of the Notification

Prior to dissecting the notification, it’s essential to grasp the concept of non-callable deposits. These are term deposits that do not allow premature withdrawal before their maturity date. The catch, however, is that banks typically offer a higher interest rate on these deposits compared to regular term deposits with a premature withdrawal facility, making them attractive for those who can commit funds for a longer period.

Key Changes Announced

The RBI’s notification has two critical amendments:

1. Increase in the Minimum Amount for Non-Callable Term Deposits (TDs): The minimum amount for non-callable TDs has been raised from INR 15 lakh to INR 1 crore. This implies that all term deposits accepted from individuals for amounts up to INR 1 crore must offer the option of premature withdrawal.
2. Applicability to Non-Resident (External) Rupee (NRE) and Ordinary Non-Resident (NRO) Deposits: The revised terms are now extended to include NRE and NRO deposits as well.

Deep Dive: Understanding the Implications

For Individual Investors:

This change predominantly affects high-net-worth individuals (HNIs) who are the primary segment utilizing such large-sized deposits. For retail investors, the impact might be relatively muted. However, it does hint at a broader regulatory approach favoring liquidity and access over locking in long-term deposits.

For Banks:

Banks need to recalibrate their deposit strategy. The higher minimum threshold for non-callable deposits could lead to a reduction in such deposits, potentially affecting the banks’ liquidity management. The increased liability in terms of providing the premature withdrawal facility for deposits up to INR 1 crore also adds to the banks’ financial planning complexities.

Market Dynamics:

The change could steer investors towards other financial instruments like mutual funds or direct equity investments, given the reduced attractiveness of non-callable deposits. However, for risk-averse investors, especially seniors who depend on bank interest as a significant income source, this could mean rethinking their investment strategies.

On Interest Rates:

With banks potentially facing a reduced inflow in non-callable deposits, there might be an upward pressure on interest rates as banks strive to attract more deposits. This could be a beneficial scenario for depositors in the short term.

NRE/NRO Deposits:

The inclusion of NRE/NRO deposits in these amendments underscores RBI’s intent to provide a uniform regulatory environment across deposit types. This could be particularly appealing to the NRI community, balancing the benefits between return on investment and liquidity.

Conclusion and Moving Forward

The RBI’s latest directions on non-callable deposits signal a cautious yet definitive step towards enhancing liquidity for depositors while balancing the banks’ need to manage their long-term fund sources. This decision, while possibly leading to some near-term disruptions, aligns with a broader financial inclusivity and stability framework.

For the common investor, the message is to reassess their investment portfolios in light of these changes. Banks, on their part, will need to innovate in their deposit products to maintain a healthy balance between attracting deposits and managing their liquidity profiles effectively.

The future may see further refinements in this policy as the RBI continues to respond to market dynamics, keeping a keen eye on the health of the banking sector and the interests of the depositors. One thing is clear: in the ever-evolving financial landscape, adaptability and informed decision-making remain key.