INDIA: Banks To Withdraw Fixed Deposit Schemes With Lock-in Tag

MUMBAI (The Economic Times), October 27, 2007: The Reserve Bank of India has asked banks to withdraw all special fixed deposits schemes that have lock-in feature. In a circular issued to all banks, RBI has said that some banks are offering special term-deposit products, in addition to regular term deposits, ranging from 300 days to five years with conditions different from the regular deposits. RBI has taken severe objection to features like 6-12 month lock-in period on deposits, not paying interest on pre-mature withdrawal, and offering higher rate of interest than offered on normal deposits. “No bank should discriminate in the matter of interest paid on deposits, between one deposit and another, accepted on the same date and for the same maturity, whether such deposits are accepted at the same office or at different offices of the bank,” said the circular. There are only two exceptions to this rule. Banks are allowed to offer higher interest rates on fixed deposit schemes specifically for resident Indian senior citizens and on bulk deposits of over Rs 15 lakh. Bankers say that some banks may have introduced the lock-in period for deposits, where interest is not paid at all in case of withdrawal before six months, to meet with asset liability management guidelines. “When banks started launching special deposit schemes at rates ranging from 9% to 9.5% earlier this year, a large number of existing high-value deposits also got repriced as customers withdrew money to reinvest them in high return schemes,” said a banker. He added that some banks may have introduced a lock-in to avoid this. Competition for more deposits and uncertainty over the direction of interest rates had compelled banks to come out with special schemes. Although liquidity is not a problem at present, banks have been reluctant to withdraw these schemes for fear of losing deposits. Copyright © 2007 Times Internet Limited.