2.5 Paise Per Rupee Per Annum

[Heather Mitchell]

CentralSector Schemes (17 per cent) and Centrally Sponsored (9 per cent), which are 100 per cent Centre-funded and partially-funded by the Centre respectively, constitute over one-fourth of the total government spending. In one-rupee terms, 26 paise goes into these schemes.

At least seven paise will go into subsidies, one paise less than 2022-23. In the Union Budget, the Centre has cut expenditure on food, fertilisers and petroleum by 28 per cent, compared to the revised estimates for the ongoing financial year.

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.

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, banks are free to fix their own deposit rates 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.

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). The interest rate on savings bank accounts too, has been deregulated with effect from October 25, 2011, subject to the conditions mentioned at paragraph 2.2B (iii).

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 an NRI, his existing Rupee accounts are designated as NRO. Such accounts also serve the requirements of foreign nationals resident in India. AD Category-I banks may permit foreign nationals who have come to India on employment and are eligible to open/hold a resident savings bank account to re-designate their resident account maintained in India as NRO account on leaving the country after their employment to enable them to receive their legitimate dues subject to certain conditions.

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 is repatriable. Further NRI/PIO may remit an amount, not exceeding USD one million per financial year, out of the balances held in NRO accounts/ sale proceeds of assets /the assets in India acquired by him by way of inheritance/legacy, on production of documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter, and an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes vide their Circular No. 10/2002 dated October 9, 2002.

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. An 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. The year 2008-09, however, saw a progressive increase in the ceiling rates to 175 basis points over and above LIBOR/Swap rates for corresponding maturities with effect from the close of business as on November 15, 2008. 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.

With a view to providing greater flexibility to banks in mobilising non-resident deposits and also in view of the prevailing market conditions, it was decided to deregulate interest rates on Non-Resident (External) Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) Accounts (the interest rates on term deposits under Ordinary Non-Resident (NRO) Accounts are already deregulated). Accordingly, banks are free to determine their interest rates on both savings deposits and term deposits of maturity of one year and above under Non-Resident (External) Rupee (NRE) Deposit accounts and savings deposits under Ordinary Non-Resident (NRO) Accounts with effect from December 16, 2011. However, interest rates offered by banks on NRE and NRO deposits cannot be higher than those offered by them on comparable domestic rupee 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 2 hereto, as applicable, and on the terms and conditions specified in the ensuing paragraphs.

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

With effect from April 29, 2003, the minimum maturity period for NRE deposits has been raised from six months to one 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 three year deposits.

(ii) In view of the satisfactory level of computerization in commercial bank branches, scheduled commercial banks were advised to calculate interest on savings bank accounts on a daily product basis with effect from April 1, 2010.

First, each bank will have to offer a uniform interest rate on savings bank deposits up to Rupees one lakh, irrespective of the amount in the account within this limit. While calculating interest on such deposits, banks are required to apply the uniform rate set by them on end-of-day balance up to Rupees one lakh.

Second, for any end-of-day savings bank balance exceeding Rupees one lakh, a bank may provide differential rates of interest, if it so chooses, subject to the condition that banks will not discriminate in the matter of interest paid on such deposits, between one deposit and another of similar amount, accepted on the same date, at any of its offices.

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.

A request letter may be obtained from the customer on maturity. While obtaining the request letter from the depositor for renewal, banks should also advise him to indicate the term for which the deposit is to be renewed. In case the depositor does not exercise his option of choosing the term for renewal, banks may renew the same for a term equal to the original term.

Renewal of deposit should be advised by registered letter / speed post / courier service to the concerned Government department under advice to the depositor. In the advice to the depositor, the rate of interest at which the deposit is renewed should also be mentioned.

If overdue period does not exceed 14 days on the date of receipt of the request letter, renewal should be done from the date of maturity. If it exceeds 14 days, banks should pay interest for the overdue period as per the policy adopted by them, and keep it in a separate interest free sub-account which should be released when the original fixed deposit is released.

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