What changed
Previously, co-operative banks were required to allow depositors to close a term, daily, or recurring deposit and reinvest the amount in a new term deposit without any interest penalty, provided the new deposit had a longer tenure than the original. Now, RBI has withdrawn that mandatory rule and permitted banks to formulate their own internal policies for such conversions, effective immediately.
What it means for you
This gives co-operative banks greater flexibility to manage their deposit books and align conversion terms with their asset-liability management strategies. Banks can now decide whether to charge a penalty or offer incentives for early closure and reinvestment, which could impact depositor behavior and funding costs. However, banks must ensure their policies are transparent and fair to avoid customer complaints.
What you must do
- Review and update your bank's internal policy on deposit conversions, including terms for penalty or no-penalty scenarios.
- Communicate the new policy clearly to all branches and customer-facing staff to ensure consistent implementation.
- Ensure the policy aligns with your asset-liability management objectives and regulatory compliance requirements.
- Monitor depositor feedback and adjust the policy if needed to maintain customer trust and operational efficiency.
Who it affects
State Co-operative Banks (StCBs), District Central Co-operative Banks (DCCBs), Depositors of co-operative banks, Treasury and ALM teams of co-operative banks
Does this circular apply to all co-operative banks?
Yes, it applies to all State and Central Co-operative Banks as specified in the circular.
Can a bank still offer no-penalty conversion if it chooses?
Yes, banks are free to decide their own policy, so they may continue no-penalty conversion or introduce penalties as per their internal guidelines.
When did this change take effect?
The circular was issued on May 28, 2012, and the permission to formulate own policies was effective immediately.