RBI raises the floor on non-breakable term deposits to ₹1 crore

Subject : Economy

Section: Monetary policy

In News: RBI raises the minimum size for non-breakable term deposits from Rs. 15 Lakh to Rs. 1 Crore, in a move to benefit retail depositors.

Key Points:

RBI reviews its Master Direction on Interest Rate on Deposits with respect to non-callable TDs, whereby it sharply increased the minimum amount for banks to offer non-callable TDs from ₹15 lakh to ₹1 crore.

Fixed Deposit rule change:

RBI has increased the minimum amount for offering non-callable term deposits to Rs 1 crore.
Earlier the limit was Rs 15 lakh. So, customers will get an option to prematurely withdraw money from their fixed deposits (FDs) of up to Rs 1 crore.
This hike in non-callable FD limit will be applicable to all commercial banks and co-operative banks with immediate effect.
These instructions shall also be applicable for Non-Resident (External) Rupee (NRE) Deposit / Ordinary Non-Resident (NRO) Deposits

What are Non-callable fixed deposits?

Non-callable fixed deposits refer to a category of term deposits that offer no premature withdrawal option before the completion of tenure.
Once you invest in these deposits, your money will be locked for the entire tenure. You can only access the money once your FD matures.
Premature withdrawal involves a penalty on the interest rate applicable on the deposit.

Why the increase in limit?

May have assessed that banks probably have reached a stage where premature withdrawals below ₹1 crore threshold will not impact them much.
RBI may have increased the limit for non-callable term-deposits to ensure that retail depositors don’t get lured by additional interest rates offered on these deposits and end up getting penalised when they need to break them in case of emergency.

How are banks likely to be affected?

It is not clear what will be the magnitude of impact on Bank’s cost of funds but this move is likely to slightly increase Bank’s funding costs, as customers earn greater interest even in case of premature withdrawal.
The earlier minimum deposit threshold (of ₹15 lakh) to offer non-callable term deposits to individuals gave them an LCR (liquidity coverage ratio) advantage. But with the increase in this threshold from ₹15 lakh to ₹1 crore, that scope has been reduced.

Liquidity Coverage Ratio

As part of post Global Financial Crisis (GFC) reforms, Basel Committee on Banking Supervision (BCBS) had introduced Liquidity Coverage Ratio (LCR).
LCR ensures that banks hold sufficient reserves of High‐Quality Liquid Assets (HQLA) to allow them to survive a period of significant liquidity stress lasting 30 calendar days.
As per RBI guidelines, LCR is represented by Stock of High‐Quality Liquid Assets (HQLA) divided by Total Net Cash Outflows (stressed outflow less stressed inflows) over the next 30 calendar days.
HQLA are defined by RBI as the liquid assets that can be readily sold or immediately convertible into cash at little / no loss of value or can be used as collateral to obtain funds in stress situations.
Banks were required to maintain LCR of 100 per cent with effect from January 1, 2019, which was delayed due to Covid-19 pandemic. Now they have to progressively increase up to the required level of 100% by December 1, 2024.