What changed
Earlier, interest rates on NRE deposits could not exceed those on comparable domestic rupee deposits. Now, for NRE deposits with maturity of 3 years and above, banks have full freedom to set interest rates without any ceiling, leveraging the CRR/SLR exemption on these deposits. The existing ceiling on NRO accounts continues unchanged.
What it means for you
Urban co-operative banks can now offer more competitive rates on long-term NRE deposits to attract non-resident rupee funds. This flexibility may help improve deposit mobilization from NRIs, but banks must manage interest rate risk and ensure pricing aligns with their asset-liability management. The benefit is temporary, valid only until November 30, 2013, subject to review.
What you must do
- Review and update your NRE deposit interest rate policy to offer rates without ceiling for tenors of 3 years and above.
- Ensure NRO account interest rates remain within the existing ceiling as per earlier directives.
- Communicate the revised rates to branches and marketing teams to attract NRE deposits before the November 30, 2013 deadline.
- Monitor the impact on deposit mix and interest cost, and prepare for possible extension or withdrawal of this relaxation.
Who it affects
Primary (Urban) Co-operative Banks, NRE depositors (non-resident Indians), Treasury and deposit operations teams
Can we offer higher rates on NRE deposits below 3 years maturity?
No, the deregulation applies only to NRE deposits with maturity of 3 years and above. For shorter tenors, the earlier ceiling (not higher than comparable domestic rupee deposits) continues to apply.
Does this circular affect NRO account interest rates?
No, the existing ceiling on NRO account interest rates remains unchanged. Only NRE deposits of 3 years and above are freed from the ceiling.
Is this relaxation permanent?
No, the instructions are valid only up to November 30, 2013, subject to review. Banks should plan accordingly and watch for further RBI communication.