Depositors who place their savings with a bank earn differential rates of interest based on the size of deposit — less than Rs 1 crore and above Rs 1 crore — and on the tenor of the deposit — the longer the period, more the interest. Additionally deposits up to Rs 1 crore can be withdrawn prematurely, resulting in asset-liability mismatch.

To correct this skew between the interest earned on loans and that paid to depositors, the RBI has allowed banks to offer deposit schemes up to Rs 1 crore which cannot be broken prematurely — so-called noncallable deposits — but which can attract different rates of interest. This opens the prospect of retail depositors, who opt for such deposits, to earn a slightly better rate of interest than on a deposit which can be broken, or a callable deposit.

At present, all deposits accepted from individuals and a Hindu Undivided Family up to Rs 1 crore can be withdrawn prematurely, leading to asset-liability mismatches in banks.

RBI's latest decision is one of the major steps in the direction of interest rate rules linked to deposits after the central bank allowed banks to offer floating rates on deposits a decade ago. The central bank will issue detailed guidelines soon. Premature withdrawal makes banks' asset-liability management difficult
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Banks are expected to offer higher interest rates to depositors if they agree not to withdraw money before maturity. "The introduction of differential rate structures for noncallable deposits will help banks in asset-liability management," 

Banks received the freedom to fix interest rates on domestic term deposits in 1997 and are now allowed to offer differential interest rates on the basis of tenure of a deposit of less than Rs 1 crore. Banks also offer different rates for deposits over Rs 1 crore.

Prior to April 1, 2013, a bank had the discretion to disallow premature withdrawal of large deposits held by corporates and Hindu Undivided Families. From April 1, 2013, banks have the discretion to disallow premature withdrawal of a term deposit in respect of bulk deposits of Rs 1 crore and above. (Economic Times)