RBI urged to evolve ‘know-your-bank' framework

Anticipating the possibility of banks outdoing each other with their new-found freedom to set interest rates on savings bank deposits, a bank depositors' body wants the Reserve Bank of India to evolve a ‘know-your-bank' framework for customers. This could serve as a guide to place deposits with banks having superior ratings.

This demand from the All-India Bank Depositors' Association comes in the wake of the RBI announcing complete deregulation of the interest rate on savings bank (SB) deposits on October 25. Prior to the liberalisation, all banks paid the stipulated 4 per cent interest rate on these deposits.

In view of the likelihood of higher interest rates being quoted on SB deposits of over Rs 1 lakh and non-availability of insurance cover on such deposits, it is all the more important that depositors know the financial standing/grading of banks before placing deposits with them, said Mr Ashok Ravat, Honorary Secretary, All-India Bank Depositors Association.

The RBI, in its second quarter review of monetary policy last Tuesday, said that each bank has to offer a uniform interest rate on SB deposits up to Rs 1 lakh. In the case of SB deposits over Rs 1 lakh, banks may provide differential rates of interest.

Bank depositors, especially those placing deposits of over Rs 1 lakh, would do well to ensure the safety of the principal deposit amount and not get lured by higher interest rates that some banks may quote on SB deposits, cautioned Mr Ravat.

Currently, insurance cover on bank deposits is limited to Rs 1 lakh per depositor on deposits held by him/ her at all the branches of a bank taken together. This cover is provided by the RBI's subsidiary, the Deposit Insurance and Credit Guarantee Corporation.

If a bank goes belly-up then the Corporation, which insures all bank deposits, such as savings, fixed, current, and recurring, can settle claims in respect of deposits up to Rs 1 lakh. The depositor has to bear the risk for deposits over this limit.

The RBI knows the status of banks' health by virtue of being their regulator and supervisor. Hence, it should make the public aware of banks' financial health through a ‘know-your-bank' framework so that depositors are aware that they are placing deposits with strong banks, said the Association representative.

When the RBI has prescribed that banks should strictly adhere to ‘know your customer' norms to prevent money laundering and financing of terrorism, customers too should have a ‘know-your-bank' reference framework so that they can place deposits with banks which have a relatively better regulatory grading.

“Before shopping around for higher interest rates on SB deposits, depositors should ensure the safety of their funds.

“The RBI knows the status of banks' health as it regulates, supervises and inspects them. There is no harm in putting the grades given to banks in public domain so that depositors can take their decisions to place deposits accordingly,” said Mr Ravat.

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