The Reserve Bank of India (RBI) has proposed allowing banks to offer different interest rates on bulk deposits based on their treatment under the liquidity coverage ratio (LCR) framework.
The proposal marks a change in the way deposits are priced. Until now, banks have had limited room to differentiate rates.
The draft rules, released earlier this month, say banks may offer different rates on bulk deposits by taking into account the run-off rates applicable to deposits and unsecured wholesale funding from retail and non-retail customers under the LCR framework.
In effect, the RBI is recognising that some deposits are more stable than others.
Deposit race intensifies
Competition for deposits has picked up. Several banks have raised deposit rates in recent days.
Mobilising deposits remains a challenge for lenders.
As of May 31, the banking industry had deposits worth ₹260.02 trillion. Of this:
- ₹33.12 trillion were demand deposits.
- ₹226.90 trillion were term deposits.
Demand deposits include savings and current accounts. Depositors can withdraw the money at any time. Such deposits usually earn lower interest.
Term deposits have a fixed maturity period. They include:
- Fixed deposits.
- Recurring deposits.
- Certificates of deposit.
Deposit growth in FY27 has been 0.9 per cent so far. It was 2.6 per cent in the same period last year.
On a year-on-year basis, deposits grew 12.2 per cent between June 2025 and May 2026. Growth was 9.9 per cent a year earlier.
Credit growth has also strengthened.
The industry’s loan book stood at ₹215.16 trillion. Credit has grown 0.7 per cent in the current financial year. In the corresponding period last year, it had contracted by 0.2 per cent.
Year-on-year credit growth was 17.7 per cent, compared with 9 per cent a year ago.
Governor stresses transparency
Speaking after the monetary policy announcement on June 5, RBI Governor Sanjay Malhotra said banks can offer differential deposit rates in certain cases.
He said such rates must be transparent and clearly displayed.
Any differential interest rate that is not transparent is “certainly not acceptable”, he said.
Questions have been raised over practices in which some banks provide benefits beyond the official interest rate to attract large depositors.
Such arrangements are seen as discriminatory because other customers do not receive the same treatment. They can also hide the true cost of funds.
Not all banks follow such practices.
How bulk deposits are placed
Large companies in both the public and private sectors often place bulk deposits through auctions.
Banks submit sealed bids. The bank offering the highest rate wins.
That rate becomes the official rate for all bulk deposits of the same maturity on that day. It may change the next day.
Some banks have also used other methods to retain customers and attract IPO float money.
Long journey towards deregulation
India’s banking system has steadily moved away from administered interest rates.
The RBI began prescribing minimum lending rates for scheduled commercial banks from October 1, 1960.
After economic liberalisation, lending rates for loans above ₹2 lakh were deregulated in October 1994.
Several lending benchmarks followed:
- Prime Lending Rate (PLR) — 1994.
- Benchmark Prime Lending Rate (BPLR) — April 2003.
- Base Rate — July 2010.
- Marginal Cost of Funds-based Lending Rate (MCLR) — April 2016.
- Repo-linked lending rate — October 2019.
- Freedom for microfinance entities to determine loan rates — March 2022.
Deposit deregulation happened gradually as well.
Key milestones included:
- April 1992: Banks allowed to set rates on term deposits of 46 days to three years and above within RBI ceilings.
- 1995: Freedom to fix rates on domestic term deposits of two years and more.
- 1996: Rates on deposits above one year decontrolled.
- October 1997: Full freedom across maturities.
- October 2011: Savings account rates deregulated.
What the draft proposal says
Under the draft amendment, a bank “shall have the freedom to offer differential interest rate on bulk deposits, by considering the differential runoff rate applicable to deposits or unsecured wholesale funding from retail or non-retail customers, respectively, under the LCR framework”.
The LCR requires banks to maintain enough high-quality liquid assets to survive a severe 30-day stress period or a sudden run on deposits.
The proposal indicates that the RBI now sees all deposits as not having the same value. Deposits with lower run-off assumptions are considered more stable.
Possible impact
The change could curb informal incentives used to attract select depositors.
At the same time, it could lead to:
- More aggressive competition for bulk deposits.
- Higher funding costs for banks.
- Pressure on net interest margins.
- Greater bargaining power for large corporate depositors.
- Higher concentration risks.
How banks respond will become clearer after the RBI finalises the framework.
TL;DR:
The RBI has proposed allowing banks to offer different rates on bulk deposits based on LCR run-off assumptions. The draft change comes as lenders compete for deposits and may alter funding strategies across the banking sector.
AI summary:
- RBI has proposed LCR-linked differential pricing for bulk deposits.
- Banking deposits stood at ₹260.02 trillion as of May 31.
- Governor Sanjay Malhotra said differential rates must be transparent.
- The proposal follows decades of interest-rate deregulation.
- Banks may face tougher competition and higher funding costs.
