In a customer-friendly move, the Reserve Bank of India has asked banks to pay interest on domestic savings deposits every quarter or shorter intervals. The interest rate on deposits must be uniform across all branches and for all customers and should not be subject to negotiation between the the depositors and the bank.
From October 2011, the central bank had deregulated savings bank deposit interest rate and the interest rate on savings bank account is calculated on a daily basis since April 2010. Each bank will offer a uniform interest rate on savings bank deposits of up to Rs 1 lakh, irrespective of the amount in the account within this limit. For any amount above Rs 1 lakh, banks provide differential rates of interest. Prior to 2010, banks used to give interest on savings accounts on the basis of the least deposit in an account between the 10th and the last day of each month. Currently, most bank offer 4% interest on savings deposit and the interest amount is paid at half yearly intervals on September 30 and March 31 each year.
If the proposed changes take place, then banks will have to spend an additional R500 crore next fiscal towards interest payment in savings deposit. For depositors, the effective yield will be 2 basis points more if banks move from half-yearly to quarterly interest payout.
The RBI circular points out that if a term deposit is maturing for payment on a non-business working day, banks will pay interest for the intervening non-business working day on the maturity value. No interest is paid on domestic current accounts. However, if the balance in the account is in the name of a deceased individual or a sole proprietorship, then interest will be paid on the current account deposits.
Interest rate on term deposit
For interest rate on term deposits, banks can determine the tenor of the deposit but the minimum tenor will be seven days. Interest on term deposits is payable at quarterly or longer rests. While differential interest rate can be offered by bank on bulk deposits, it will not be applicable on deposit schemes framed on the basis of the Bank Term Deposit Scheme, 2006 or the deposits received under the Capital Gains Accounts Scheme, 1988.
A term deposit is a contract between the bank and the customer for a definite term and it cannot be paid prematurely at the bank’s option. However, a term deposit can be paid prematurely at the request of the customer subject to the terms of the contract, including penalty, if any. The central bank’s recent circular underlines that banks can offer term deposits without premature withdrawal option, provided that all term deposits accepted from an individual for Rs 15 lakh and below will have premature withdrawal facility. The interest rate on premature withdrawal will be at the rate applicable to the amount and the period for which the deposit remained with the bank and not at a contracted rate. However, no interest will be paid where the premature withdrawal of deposits takes place before the completion of the minimum period.
Banks can formulate special fixed deposit schemes specifically for resident Indian senior citizens offering higher and fixed rates of interest as compared to normal deposits of any size. Banks can offer differential rates of interest on non-resident external account (NRE) term deposits as in the case of domestic term deposits of Rs 15 lakh and above.
Banks can also fix the rate of interest chargeable on loans and advances against foreign currency (non-resident) accounts FCNR(B) deposits to the depositors with reference to their base rate irrespective of whether repayment is made in rupees or in foreign currency.
For penalty on premature withdrawal of domestic term deposits, the central bank has noted that there will be a comprehensive policy on penalties for premature withdrawal of term deposits approved by the board of directors. The components of penalty will have to be clearly brought to the notice of the depositors at the time of acceptance of deposits. Otherwise, banks cannot levy any penalty on premature withdrawal.
If a term deposit matures and proceeds are unpaid, the amount left unclaimed with the bank will get interest rate of savings bank account. In case of floating term deposits, the rate will be linked o a directly observable and transparent market determined external benchmark. Banks can pay additional interest of 1% per annum over and above the rates mentioned by banks for deposits of bank’s staff, chairman and managing director, executive directors and other executives appointed for a fixed tenure.
Terms of deposits
* A term deposit is a contract between the bank and the customer for a definite term and it cannot be paid prematurely at the bank’s option
* For interest rate on term deposits, banks can determine the tenor of the deposit but the minimum tenor will be seven days
* The interest rate on premature withdrawal will be at the rate applicable to the amount and the period for which the deposit remained with the bank and not at a contracted rate
* If a term deposit matures and proceeds are unpaid, the amount left unclaimed with the bank will get interest rate of savings bank account