The Delhi High Court observed that Clause 3.3 of the RBI circular gives banks the freedom to set interest rates. (Image for representative purpose only)
Can banks change the rate of returns for fixed deposits on non-renewal? The Delhi High Court has ruled in favour of a fixed deposit holder after a bank cut the interest rate on his Rs 5.89-crore FD from 7.75% to 3.5%.In its September 23, 2026, ruling, the Delhi High Court directed the bank to pay the highest applicable interest rate on the deposit, granting relief to the FD holder.
What the case is about
The fixed deposit had been opened after a court order which arose from a dispute between two parties. The parties had opted for arbitration to resolve the matter under Section 9 of the Arbitration and Conciliation Act, 1996.Also Read | Man invested Rs 10 lakh, which tax department treated as unexplained; he first cited cash loan, then bank withdrawals as source, ITAT Nagpur deletes addition and Rs 2.11 lakh penaltyIn an order passed in 2008, the Delhi High Court directed that the Rs 5.89 crore held in the deposit holder's bank account be kept secured in a bank until the dispute was resolved by the court.
It also instructed the bank to create a fixed deposit for the entire amount, carrying the maximum rate of interest.Initially, the FD earned interest at rates of 7.75%, 8.25% and 7.75% over different periods.However, from January 30, 2018, the bank lowered the rate to 3.5%. Challenging the reduction, the deposit holder approached the court again, arguing that the bank had cut the interest rate without any valid reason or justification.
Representing the bank, its lawyer argued that Clause 3.3 of the RBI circular allowed the bank to decide the interest rate applicable to the fixed deposit. The lawyer also invoked Clause 3.4 of the circular, contending that if a fixed deposit receipt was not renewed upon maturity, the deposit would earn interest at the prevailing savings bank rate.'Also Read | Retired bank employee got Rs 12.27 lakh leave encashment and claimed Rs 3 lakh exemption in 2020, but government later hiked limit to Rs 25 lakh in 2023; ITAT Chennai allows full tax exemption
Why did the fixed deposit holder win the case?
The Delhi High Court observed that Clause 3.3 of the RBI circular gives banks the freedom to set interest rates on domestic term deposits across different tenures.
However, this discretion comes with a condition: banks cannot discriminate between deposits accepted on the same date, whether they are held at the same branch or at different branches of the bank.The Delhi High Court noted that the interest rate on the FD in question, which had been created following an earlier court order, was reduced. However, the bank failed to establish that the interest rate on all comparable fixed deposits had also been brought down to 3.5%.The court also noted that the order did not specify the period for which the FD had to be maintained. However, there was no evidence to show that the bank had informed the affected parties, namely the deposit holder and the third party, that the deposit had matured and needed to be renewed.Nor had the bank approached the arbitrator or the High Court for directions on renewing the FD. It had also not informed either forum that the winding-down of its operations had prompted it to reduce the deposit's interest rate to the savings bank rate.Also Read | 83-year-old woman got Rs 12.28 lakh after son’s death, but sought Rs 15,000 maintenance from college-going granddaughter and a share of family pension from son’s widow; Kerala HC rejects both claimsBanks may reduce the interest paid on fixed deposits, but their actions must remain within the limits prescribed by the RBI and comply with its rules, Siddartha Karnani, Partner at King Stubb and Kasiva, told ET.Karnani explained that under the RBI's rules, when a term deposit or fixed deposit reaches maturity and the money is not paid out, the unclaimed amount earns interest at the savings account rate. This was also the basis of the bank's position in the Delhi High Court case, he said, referring to the relevant RBI circular.The rules, however, were amended in July 2021. Under the revised provision, an overdue deposit earns interest at either the savings account rate or the rate originally agreed upon, whichever is lower. The amended wording is set out in paragraph 10.2 of the RBI's Master Direction on Interest Rate on Deposits, 2025.Co-operative banks, however, operate under a separate set of directions. As a result, the specific provision applicable to a deposit depends on the type of bank involved.Despite having the discretion to set deposit rates, banks cannot apply them arbitrarily, Karnani said. Two fixed deposits accepted on the same date for the same tenure cannot be given different interest rates. Banks must also explain how they calculate interest when accepting deposits and display the relevant information at their branches.Also Read | Man paid Rs 1.73 crore for Gurgaon flat, waited over a decade without possession; builder alleges homebuyer bought it for commercial gain, consumer commission awards refund with 12% interest & Rs 4 lakhFurther, where a depositor has provided an explicit instruction to renew an FD automatically, the bank should follow that instruction instead of allowing the deposit to become overdue and earn interest at a lower rate.According to Siddartha Karnani, the bank's failure to treat the deposit differently from a regular customer FD, despite it being governed by a court order, was central to its defeat. It also failed to inform the parties that it had reduced the interest rate.The Single Judge's May 22, 2019 order had directed the bank to deposit the amount with the Registrar General, with interest from January 30, 2018 calculated using the average of the three earlier rates. The Division Bench upheld those directions and dismissed the bank’s appeal on September 23, 2026.