RBI lets banks set rules for conversion of recurring deposits to term deposits

The Reserve Bank has allowed banks to formulate their own policies towards conversions of daily or recurring deposits to fixed deposits.

RBI, however, has asked banks to allow immediate conversion of daily deposits or recurring deposits so as to enable depositors to immediately reinvest the amount lying in these deposits with the same bank in another term deposit, RBI said in a release today.

Banks are required to pay interest in respect of such term deposits without reducing the interest by way of penalty, provided that the deposit remains with the bank after reinvestment for a period longer than the remaining period of the original contract, RBI said in its annual policy statement.

Meanwhile, RBI had set 1 July 2010 deadline for banks to switch over to the new `Base Rate' system.

The Base Rate will replace the Benchmark Prime Lending Rate followed by banks in India.

The Base Rate was formulated on the basis of the recommendations of an RBI working group, headed by Deepak Mohanty, set up to review the BPLR system and suggest changes to make credit pricing more transparent. The group submitted its report in October 2009 and the same was placed on the Reserve Bank's website for public comments.

RBI has already issued guidelines on the Base Rate system, which is expected to facilitate better pricing of loans, enhance transparency in lending rates and improve the assessment of transmission of monetary policy.