Amendment to Master Direction – Reserve Bank of India (Interest Rate on Deposits) Directions, 2016

In exercise of the powers conferred by Sections 21 and 35 A of the Banking Regulation Act, 1949, the Reserve Bank of India being satisfied that it was necessary and expedient in the public interest, issued the Master Direction of 2016, also known as the Master Direction – Reserve Bank of India (Interest Rate on Deposits) Directions, 2016[1]. It consists of Seven Chapters and 30 Sections.

This Master Direction of 2016 is aimed at providing guidelines for regulating the interest rates on deposits by all commercial and cooperative banks in India on various types of deposits like Domestic Deposits, Term Deposits, Domestic Savings Deposits, Rupee Deposits Non-Residents, etc. The applicability of this direction extends toevery Scheduled Commercial Bank [including Regional Rural Banks (RRBs)], Small Finance Banks, Payment Banks and Local Area Banks but does not include the operations of foreign branches of Indian banks, as provided by Section 2 of the Master Direction.  Effective from March 3, 2016, the primary aim of the directions is to ensure consistency and transparency in the determination and dissemination of interest rates across financial institutions.

Key Provisions

• Interest Rate Determination:

Banks are granted the freedom to set interest rates on deposits. However, they must ensure that the interest rates are reasonable, non-discriminatory, and transparent. The interest rates should be determined based on market conditions, the bank’s cost of funds, and its liquidity requirements.

• Uniform Application:

Interest rates on deposits must be uniform across all branches of a bank. This ensures that customers, regardless of their location, receive the same rate of interest for similar types of deposits.

• Disclosure Requirements:

Banks are mandated to clearly display their deposit interest rates at all branches and on their websites. This includes the rates for savings accounts, fixed deposits, recurring deposits, and any special schemes. Changes in interest rates must be communicated promptly to customers.

• Calculation and Payment:

Interest on savings accounts is to be calculated on a daily product basis and credited to the account at quarterly or shorter intervals. For term deposits, interest can be paid at monthly, quarterly, half-yearly, or yearly intervals as per the customer’s choice.

• Penalty for Premature Withdrawal:

Banks can levy a penalty for premature withdrawal of term deposits. The penalty structure, which may involve reducing the interest rate applicable to the withdrawn amount, must be clearly communicated to the depositors at the time of deposit placement.

Amendment to Master Direction of 2016

RBI released a notification dated 07.06.2024 amending the Master Direction of 2016. Paragraph 3(a)(i) of the Master Direction – Reserve Bank of India (Interest Rate on Deposits) Directions, 2016 dated March 03, 2016, consisting of the definition of “Bulk Deposits” has been amended. These instructions were issued in exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949.

The table below depicts the amendment made to the definition:

Conclusion

The Master Direction ensures a standardized approach towards deposit interest rates, enhancing the credibility and transparency of the banking system. By empowering banks to set competitive rates, it fosters a healthy competition while protecting consumer interests through stringent disclosure and uniformity requirements. This regulatory framework plays a crucial role in maintaining depositor confidence and promoting the efficient functioning of the financial system.

[1] https://rbi.org.in/scriptS/BS_ViewMasterDirections.aspx