Bankers say interest rate cycle key to non-callable deposits gathering pace

The soon-to-be-announced non-callable deposits, or deposits which can be withdrawn only on maturity, may see a pick up only when the deposit rate cycle moves upwards.

Some bankers have expressed their willingness to pay higher interest rates on such deposits as there is more certainty of the deposits staying with them. However, customers may wait till deposit rates rise, bankers said.

 Paresh Sukthankar, Deputy Managing Director, HDFC Bank, said, “Customers may not rush into non-callable deposits. If deposit rates are on their way down, it isn’t meaningful for them to go for it right now…The differential rates can be applied but at this juncture, banks are less likely to offer that premium. Why would they pay when customers will go for those deposits where the rates are going to be higher in the near future. Though, how much premium should the banks pay, that the banks will have to decide.”

 Earlier this month while announcing the monetary policy review, the RBI said, “All deposits accepted from individuals and Hindu Undivided Family (HUF) up to ₹1 crore are callable — have the facility of premature withdrawal. This results in asset-liability management issues…It is, therefore, proposed to allow non-callable deposits.”

This means that once a depositor agrees to deposit a sum of money in a non-callable deposit, he will not be able to withdraw it till the end of the contracted tenure. Such deposits, however, can fetch higher interest.

 VR Iyer, Chairperson and Managing Director, Bank of India, said, “This is a good idea as I know about the certainty of my deposits. So, it will improve my ALM (asset-liability management) profile. It will definitely improve my liquidity coverage ratio and will come in handy.”

 In case of non-callable deposits, the uncertainty (about deposits being withdrawn prematurely) will go away. Hence, banks will be ready to pay a higher interest rate to depositors.

Comfortable for now  Though RBI has proposed non-callable deposits to facilitate graduating towards these liquidity ratios, Iyer said her bank is comfortable for now. “But small- and mid-sized private sector banks may need to go for it as they are already paying more on CASA (current account, savings account) and so such non-callable deposits will help them.”

 According to the RBI, premature withdrawal results in asset-liability management issues, especially Liquidity Coverage Ratio (LCR) requirement under the Basel III framework. It is, therefore, proposed to allow non-callable deposits.

Callability in a deposit will then be a distinguishing feature for offering differential rates on interest on deposits, RBI said. The banking regulator will release final guidelines on issuing these deposits shortly.

“What I will get in return is more important for me to lock in a big sum for a longer period,” Aniket, a 28-year-old working with an engineering firm said. Currently, only five-year fixed deposits that are invested for tax-saving purposes are non-callable. Under all other FDs, it is uncertain when customers will withdraw their deposits as they can opt to withdraw the amounts before maturity of the FD, thereby leaving banks grappling with liquidity mismatches.

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