RBI/2007-2008/41
DBOD.No. Dir. BC. 7/13.03.00/2006-07

July 2, 2007
Aashadha 11, 1929(Saka)

Master Circular on Interest Rates on Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO) and Non-Resident (External) (NRE) Accounts

Purpose

To consolidate the directives on interest rates on Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO) and Non-Resident (External) (NRE) Accounts issued by Reserve Bank of India from time to time.

A statutory directive issued by the Reserve Bank in exercise of the powers conferred under Section 35 A of the Banking Regulation Act, 1949.

This Master Circular consolidates the instructions on the above subject contained in the circulars listed in Annex 4.

To all Scheduled Commercial Banks, excluding Regional Rural Banks.

2.1 Definitions
2.2 Minimum tenor and rates of interest payable on Savings deposits and on Term deposits.
2.3. Payment of interest on fixed deposit - Method of calculation of interest
2.4 Additional interest to AGID, NGIF and AFGIS
2.5 Discretion to Regional Rural Bank/Local Area Bank to pay additional interest
2.6 Discretion to pay additional interest not exceeding one percent on deposits of bank’s staff and their exclusive associations
2.7 Discretion to pay additional interest on deposits of Chairman and Managing Director and Executive Directors of the bank
2.8 Discretion to pay interest on current account maintained by RRBs with sponsor bank
2.9 Discretion to pay interest on the minimum credit balance in the composite cash credit account of a farmer
2.10 Deposit Scheme for Senior Citizens
2.11 Premature withdrawal of term deposit
2.12 Conversion of term deposit, deposit in the form of daily deposit or recurring deposit for reinvestment in term deposit
2.13 Renewal of Overdue deposits

4 Advance against term deposit – Manner of charging interest

2.14 Margin on advance against term deposit
2.15 Restrictions on advances against NR(E)RA Deposits -

Quantum of Loans

2.17 Interest payable on the deposit account of a deceased depositor
2.18 Notifying RBI regarding change in interest on deposits and also the break-up of deposits according to different interest rate ranges
2.19 Addition or deletion of the name/s of joint account holders
2.20 Rounding off of transactions
2.21 Issue of term deposit receipt
2.22 Payment of interest on term deposit maturing on Sunday/ holiday/non-business working day
2.23 Deposit Mobilisation Schemes
2.24 Minimum balance in savings bank accounts
2.25 No-frills account
2.26 Exemptions
2.27 Prohibitions

3. ANNEX

Prior to reforms, RBI prescribed the deposit rates and the maturities on deposits that could be offered by banks. There was no price competition among suppliers of banking services and the customer had only limited products to choose from. As a result of deregulation, barring saving deposits, banks are free to fix their own deposit rates for different maturities, which implies choices for the depositor. Also, a customer can earn interest on a term deposit for a minimum period of 7 days. Banks are now also free to offer varying rates of interest for different sizes of deposits above a cut-off point, since the cost of transaction differs by size. Earlier, RBI decided the penalty structure for premature withdrawal of deposits, but this has now been left to each bank so that banks can manage interest rates.

With effect from October 22, 1997, RBI has given the freedom to commercial banks to fix their own interest rates on domestic term deposits of various maturities with the prior approval of their respective Board of Directors/Asset Liability Management Committee (ALCO). However, RBI regulates interest rates on savings bank accounts and the savings bank interest rate is currently fixed at 3.5% per annum, which is unchanged from March 1, 2003.

A domestic rupee account may be opened as current, savings or term deposit.

1.2. Ordinary Non-Resident (NRO)

NRIs can open Non-Resident Ordinary (NRO) deposit accounts for collecting their funds from local bonafide transactions. NRO accounts being Rupee accounts, the exchange rate risk on such deposits is borne by the depositors themselves. When a resident becomes a NRI, his existing Rupee accounts are designated as NRO. Such accounts also serve the requirements of foreign nationals resident in India. NRO accounts can be maintained as current, saving, recurring or term deposits.

While the principal of NRO deposits is non-repatriable, current income and interest earning up to US $ 1 million per calendar year is repatriable out of the NRO balances/ sale proceeds of assets held in India. Interest income from NRO accounts is not exempt from income tax, as is the case with domestic deposits.

The Non-Resident (External) Rupee Account NR(E)RA scheme, also known as the NRE scheme, was introduced in 1970. Any NRI can open an NRE account with funds remitted to India through a bank abroad. This is a repatriable account and transfer from another NRE account or FCNR(B) account is also permitted. A NRE rupee account may be opened as current, savings or term deposit. Local payments can be freely made from NRE accounts. Since this account is maintained in Rupees, the depositor is exposed to exchange risk. NRIs / PIOs have the option to credit the current income to their Non-Resident (External) Rupee accounts, provided the authorised dealer is satisfied that the credit represents current income of the non-resident account holders and income-tax thereon has been deducted / provided for.

Prior to 1990s, in line with the regulation of domestic deposit rates, interest rates on various NRI deposit schemes were regulated. As a first step towards flexibility, the detailed maturity-wise prescriptions were rationalized in 1992 for NRE deposits, in line with the flexibility provided for domestic deposits. With a view to aligning the maturity structure of NRE and domestic deposits, interest rates on NRE term deposits of maturity over 2 years were freed effective April 4, 1996 while those for maturity over 1 year were freed effective April 16, 1997. Effective September 13, 1997, banks were given complete freedom to decide interest rates across all maturities.

In response to changing conditions in the financial markets, interest rates on NRE term deposits were linked to the international rates by way of a ceiling of 250 basis points over and above the US Dollar LIBOR/Swap rates of corresponding maturities, effective July 17, 2003. The ceiling rates were progressively reduced and brought down to LIBOR/SWAP rates for corresponding maturities with effect from close of business as on April 24, 2007. Alongside, the NRE savings deposits rate was delinked from the domestic savings deposits rate and the ceiling NRE savings deposits rate was fixed at 6-month US Dollar LIBOR/Swap rate effective April 17, 2004. However, with effect from the close of business in India on November 17, 2005, the interest rates on NRE saving deposits are the same as applicable to domestic savings deposits.

Commercial banks should not pay interest on deposits of money accepted or renewed by them in Domestic, Ordinary Non-Resident (NRO) and Non-Resident (External) Accounts (NRE) except in accordance with the rates specified in the Annex 1 and Annex 2 hereto, as applicable, and on the terms and conditions specified in the paragraphs below.

For the purpose of this circular,

(a) "Demand liabilities" and "Time liabilities" means the liabilities as shown in the return submitted by the bank under sub-section (2) of Section 42 of the Reserve Bank of India Act, 1934;

(b) "Demand deposit" means a deposit received by the bank, which is withdrawable on demand;

(c) "Savings deposit" means a form of demand deposit which is a deposit account whether designated as "Savings Account", "Savings Bank Account", "Savings Deposit Account" or other account by whatever name called which is subject to the restrictions as to the number of withdrawals as also the amounts of withdrawals permitted by the bank during any specified period;

(d) "Term deposit" means a deposit received by the bank for a fixed period and which is withdrawable only after the expiry of the said fixed period and shall also include deposits such as Recurring/Cumulative/Annuity/Reinvestment deposits, Cash Certificates, and so on;

(e) "Notice deposit" means term deposit for specific period but withdrawable on giving at least one complete banking day’s notice;

(f) "Current Account" means a form of demand deposit wherefrom withdrawals are allowed any number of times depending upon the balance in the account or up to a particular agreed amount and shall also be deemed to include other deposit accounts which are neither Savings Deposit nor Term Deposit;

(g) "Countervailing interest" means any benefit of interest allowed on any account in the nature of current account maintained with the bank by its borrower;

(h) "Budgetary allocation" means the allocation of funds by the Government made through the budget, wherein all the Government’s expenditure is reflected. Any institution, irrespective of the fact that it is a Government Department, Semi-Government or Quasi-Government Body, which receives grants, loans or subsidies from the Government is said to depend on budgetary allocation. Government grants to institutions are also in the nature of the budgetary allocation. Government’s subscription to the share capital of these institutions also forms part of the budgetary allocation. Local bodies like Municipal Corporations, Zilla Parishads, Taluka Panchayats and Gram Panchayats are given grants in the nature of ‘compensation and assignments’, which also form part of budgetary allocation, although taxes collected by these bodies are not covered under the definition and scope of budgetary allocation of Central and State Governments;

(i) "Public Sector Bank" means the State Bank of India constituted under the State Bank of India Act, 1955 or any subsidiary bank as defined in clause (k) of Section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 or any corresponding new bank as defined in clause (b) of Section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

Note: NRO/NRE deposits can be accepted only by banks, which are authorized by Reserve Bank to accept such deposits.

2.2 Minimum tenor and rates of interest payable on Savings deposits and on Term deposits.

The minimum tenor of domestic/ NRO term deposits is 7 days. Prior to November 1, 2004, banks were permitted to accept term deposits of Rs. 15 lakh and above for a minimum maturity period of 7 days and, in case of term deposits of less than 15 lakh, the minimum maturity period was 15 days. With effect from November 1, 2004, the minimum tenor of domestic/NRO term deposits below Rs. 15 lakh has been reduced from 15 days to 7 days.

With effect from April 29, 2003, the minimum maturity period for NRE deposits has been raised from 6 months to 1 year, making the range of the maturity period for fresh NRE term deposits from one to three years, in line with FCNR(B) deposits. However, banks are allowed to accept NRE deposits above three years from their Asset Liability point of view, provided the rate of interest on such long term deposits is not higher than that applicable to 3 year deposits.

(i) Banks should pay interest on savings deposits and term deposits, including NRE deposits, at the rates specified in Annex 1 and Annex 2 to this circular. A bank must obtain prior approval of its Board/Asset Liability Management Committee (if powers are delegated by the Board) for fixing interest rates of various maturities.

(ii) Such interest should be paid at quarterly or longer rests.

(iii) In the case of savings deposits, interest should be calculated on the minimum balance to the credit of the deposit account during the period from the 10^th to the last day of each calendar month and credited to the account only when it is Re.1/- or more.

On Domestic Term Deposits, a bank may offer floating rate clearly linked to an anchor rate. In order to ensure transparency, banks should not use internal or derived rates while offering floating rate deposit products. Only market-based rupee benchmark rates, which are directly observable and transparent to the customer, should be used by banks for pricing their floating rate deposits.

Indian Banks’ Association (IBA) Code for Banking Practice has been issued by IBA for uniform adoption by the Member Banks. The Code is intended to promote good banking practices by setting out minimum standards, which Member Banks should follow in their dealings with customers. IBA, for the purpose of calculation of interest on domestic term deposit, has prescribed that on deposits repayable in less than three months or where the terminal quarter is incomplete, interest should be paid proportionately for the actual number of days reckoning the year at 365 days. Some banks are adopting the method of reckoning the year at 366 days in a Leap year and 365 days in other years. While banks are free to adopt their methodology, they should provide information to their depositors about the manner of calculation of interest appropriately while accepting the deposits and display the same at their branches.

A Public Sector Bank is permitted to pay additional interest of 1.28 per cent per annum over and above the normal rate of interest permissible in terms of directives on interest rates on deposits issued by Reserve Bank of India, from time to time, on term deposits for 2 years and above of Army Group Insurance Directorate (AGID), Naval Group Insurance Fund (NGIF) and Air-Force Group Insurance Society (AFGIS) only, provided such deposits are not in any way linked with payment of insurance premia by the bank.

Regional Rural Banks/Local Area Banks may, at their discretion, allow additional interest of half percent per annum on savings deposits. These banks are, however, encouraged not to pay any additional interest on saving bank accounts over and above what is payable by commercial banks.

2.6. Discretion to pay additional interest not exceeding one percent on deposits of bank’s staff and their exclusive associations

A bank may, at its discretion, allow additional interest at a rate not exceeding one per cent per annum over and above the rate of interest stipulated in Annex 1 & Annex 2 to this circular subject to following conditions:

2.6.1. In respect of a savings or a term deposit account opened in the name of:

(a) a member or a retired member of the bank’s staff, either singly or jointly with any member or members of his/her family; or
(b) the spouse of a deceased member or a deceased retired member of the bank’s staff; and
(c) an Association or a fund, members of which are members of the bank’s staff;

A bank should obtain a declaration from the depositor concerned, that the monies deposited or which may, from time to time, be deposited into such account belong to the depositor as stated in clauses (a) to (c) above.

2.6.2. For the purposes of sub-paragraph 2.6.1. -

(i) "a member of the bank’s staff" means a person employed on a regular basis, whether full-time or part-time, and includes a person recruited on probation or employed on a contract of a specified duration or on deputation and an employee taken over in pursuance of any scheme of amalgamation, but does not include a person employed on casual basis.

(a) In the case of employees taken on deputation from another bank, the bank from which they are deputed may allow additional interest in respect of the savings or term deposit account opened with it during the same period of deputation;

(b) In the case of persons taken on deputation for a fixed duration, or on a contract of a fixed duration, the benefit will cease to accrue on the expiry of the term of deputation or contract, as the case may be.

(ii) "A retired member of the bank’s staff" means an employee retiring whether on superannuation or otherwise as provided in the bank’s Service/Staff Regulations, but does not include an employee retired compulsorily or in consequence of disciplinary action;

(iii) "Family" means and includes the spouse of the member/retired member of the bank’s staff and the children, parents, brothers and sisters of the member/retired member of the bank’s staff, who are dependent on such member/retired member, but does not include legally separated spouse;

2.6.3. Payment of additional interest is subject to the following conditions, namely:

(i) The additional interest is payable only so long as the person continues to be eligible for the same and in case of his ceasing to be so eligible, till the maturity of a term deposit account;

(ii) In the case of employees taken over pursuant to the scheme of amalgamation, the additional interest is allowed only if the interest at the contractual rate together with the additional interest does not exceed the rate, which could have been allowed if such employees were originally employed by the bank.

2.6.4. Bank Employees’ Federations in which bank employees are not direct members are not eligible for additional interest.

2.6.5. In case of Domestic deposits, it will be in order for banks to give their retired staff, who are senior citizens, the benefit of higher interest rates as admissible to senior citizens (60 years of age or above) over and above the additional interest of not exceeding one per cent payable to them by virtue of their being retired members of the banks' staff.

2.6.6. In the case of Non-Resident (External) deposits of staff members, existing or retired, interest rate including any additional interest paid to them by virtue of their being staff members, should not exceed the ceiling stipulated by RBI.

A bank may, at its discretion, pay additional interest not exceeding one per cent per annum over and above the rate of interest stipulated in Annex 1 & Annex 2 to this circular on deposits accepted/renewed from Chairman, Chairman & Managing Director, Executive Director or such other Executive appointed for a fixed tenure. However, they are eligible to get the benefit under paragraph 2.6 above only during the period of their tenure.

2.8. Discretion to pay interest on current accounts maintained by Regional Rural Banks with sponsor banks

Banks may pay interest on current account of a Regional Rural Bank sponsored by them. However, banks are encouraged not to pay interest on the current accounts maintained by RRBs with them.

A bank may, at its discretion, pay interest at a rate based on its perception and other relevant factors on the minimum credit balance in the composite cash credit account of a farmer during the period from the 10^th to the last day of each calendar month.

Banks have been permitted to formulate, with the approval of their Boards of Directors, fixed deposit schemes specifically for resident Indian senior citizens offering higher and fixed rates of interest as compared to normal deposits of any size. These schemes should also incorporate simplified procedures for automatic transfer of deposits to nominee of such depositors in the event of death.

(i) A bank, on request from the depositor, should allow withdrawal of a term deposit before completion of the period of the deposit agreed upon at the time of making the deposit. The bank will have the freedom to determine its own penal interest rate of premature withdrawal of term deposits. The bank should ensure that the depositors are made aware of the applicable penal rate along with the deposit rate. While prematurely closing a deposit, interest on the deposit for the period that it has remained with the bank will be paid at the rate applicable to the period for which the deposit remained with the bank and not at the contracted rate. No interest is payable, where premature withdrawal of deposits takes place before completion of the minimum period prescribed. However, the bank, at its discretion, may disallow premature withdrawal of large deposits held by entities other than individuals and Hindu Undivided Families. The bank should, however, notify such depositors of its policy of disallowing premature withdrawal in advance, i.e., at the time of accepting such deposits.

(ii) In the case of premature withdrawal of NRE term deposits for conversion into Resident Foreign Currency (RFC) Account, the bank should not levy any penalty for premature withdrawal. If such a deposit has not run for a minimum period of 1 year, the bank may, at its discretion, pay interest at a rate not exceeding the rate payable on savings deposits held in RFC accounts, provided the request for such a conversion is made by the NRE account holder immediately on return to India.

(iii) Conversion of NRE deposit into FCNR(B) deposit and vice versa before maturity should be subject to the penal provision relating to premature withdrawal.

(iv) Conversion of NRSR/NRNR deposit into NRO deposit before maturity will be subject to the penal provision relating to premature withdrawal.

(v) In view of the discontinuance of NRNR/NRSR schemes with effect from April 1, 2002, the proceeds of NRNR deposits can be credited to NRE accounts on maturity but not to FCNR(B) accounts, while proceeds of NRSR accounts can be credited on maturity to NRO accounts only. In case of premature withdrawal of NRNR/NRSR deposits, the proceeds should be credited to NRO accounts only.

2.12. Conversion of a term deposit, a deposit in the form of daily deposit or a recurring deposit for reinvestment in term deposit

A bank, on a request from the depositor, should allow conversion of a term deposit, a deposit in the form of daily deposit or recurring deposit, to enable the depositor to immediately reinvest the amount lying in the aforesaid deposits with the same bank in another term deposit. The bank should pay interest in respect of such a term deposit in the manner indicated in paragraph 2.11 above without reducing the interest by way of penalty as stated in the said paragraph provided that the deposit remains with the bank after reinvestment for a period longer than the remaining period of the original contract.

All aspects concerning renewal of overdue deposits may be decided by individual banks subject to their Board laying down a transparent policy in this regard and the customers being notified of the terms and conditions of renewal including interest rates, at the time of acceptance of deposit. The policy should be non-discretionary and non-discriminatory.

(a) When an advance is granted against a term deposit and the deposit stands in the name of -

(i) the borrower, either singly or jointly;
(ii) one of the partners of a partnership firm and the advance is made to the said firm;
(iii) the proprietor of a proprietary concern and the advance is made to such a concern;
(iv) a ward whose guardian is competent to borrow on behalf of the ward and where the advance is made to the guardian of the ward in such a capacity;

the bank would be free to charge interest rate without reference to its Benchmark Prime Lending Rate (BPLR) including advances granted against NRE term deposits and repaid in Foreign Currency or Rupees.

If the term deposit against which an advance was granted is withdrawn before completion of the prescribed minimum maturity period, such an advance should not be treated as advance against the term deposit and interest should be charged as prescribed in terms of the Reserve Bank of India’s directive on Interest Rates on Advances issued from time to time.

(b) When an advance is granted against a term deposit which is not in the nature of those at items (i) to (iv) in sub-clause (a) above, a bank would be free to charge interest rate without reference to the Benchmark Prime Lending Rate, provided the advance is up to Rs.2 lakh. However, if the advance exceeds Rs. 2 lakh, the bank should charge interest at the rate prescribed in terms of Reserve Bank of India’s directive relating to Interest Rates on Advances issued from time to time.

A bank, at its discretion, should not apply the rate of interest as stipulated at (a) above in the case of advances up to Rs.3 lakh granted to a member/retired member of the bank’s staff or the spouse of a deceased member/retired member of the bank’s staff against their term deposits specified in paragraph 2.6 above.

(c) The account holder of NRE savings deposits can withdraw the savings deposits at any time and therefore, banks should not mark any type of lien, direct or indirect, against these deposits. (As regards domestic saving deposits, banks may follow the guidelines issued by IBA / existing practices approved by their Board in this regard.)

The decision in regard to margin against term deposit has been left to the discretion of individual banks subject to their Board laying down a transparent policy in this regard.

2.16. Restrictions on advances against NR(E)RA Deposits - Quantum of loans

* With effect from the close of business in India on November 17, 2005, the rate of interest on domestic savings account will also be applicable to NRE savings account.