Banks have requested the Reserve Bank of India (RBI) to allow them to prepay high-cost deposits, to avoid liquidity and interest rate risks. At present, banks do not have the freedom to prepay deposits that carry higher interest rates, even though depositors have the option of withdrawing their deposits.

Bankers made this demand at a meeting with RBI Governor Y V Reddy, ahead of the 2007-8 monetary policy announcement on April 24. The delegation included the heads of ICICI Bank, IDBI Bank, Bank of Baroda,UTI Bank, and Citigroup.

"Banks should have the right to prepay deposits before maturity. This will ensure that they enjoy a level-playing field vis-a-vis depositors," said a senior banker.

For instance, a bank that contracted a three-month deposit at 12 per cent interest may want to prepay after a month. The reasons for this could be many: the bank could have got out of a tight liquidity situation or now has greater access to cheaper deposits.

Banks were seen chasing depositors in the last quarter of 2006-07 at rates much higher than the published rates. Some banks even offered as high as 12 per cent for less than one-year deposits. A foreign bank was even offering 9.5 per cent for a 99-day retail deposit.

Finance Minister P Chidambaram has also sought from chairmen of public sector banks details on the high cost bulk deposits accepted by them towards the end of 2006-07 when he meets them for a review of operations in New Delhi tomorrow.