SBI reduces savings rate, sets stage for RBI rate cut

Mumbai: State Bank of India (SBI) cut the interest rate on savings accounts with balance of up to Rs1 crore by 50 basis points to 3.5%—the first time the key rate has been cut since being deregulated in 2011. Coming two days ahead of the monetary policy review by the Reserve Bank of India (RBI), the cut, likely to be emulated by other banks, may eventually lead to lower lending rates as well.

In a notice to stock exchanges on Monday, India’s largest lender said it was introducing a two-tier savings rate effective immediately. Deposits above Rs1 crore will continue to earn an annual interest of 4%.

One basis point is one-hundredth of a percentage point.

SBI cited a decline in the rate of inflation and high real interest rates as key reasons for cutting the savings deposit rate. Retail inflation fell to 1.54% in June, pushing the inflation-adjusted yield on one-year treasury bills to 4.82%, among the highest in Asia. Some economists, such as Pranjul Bhandari of HSBC Securities & Capital Markets (India) Pvt. Ltd, believe that RBI’s target of 4% may have become the new normal for inflation in India compared with an average of close to 6% during 2008-13.

Secondly, while banks are sitting on a large liquidity surplus, with huge deposit inflows after demonetization and 6.1% credit growth as of 7 July, SBI argued that its incremental cost of funds was going up as demonetization deposits had started flowing out. About 60% of these demonetization deposits have left, said Rajnish Kumar, a managing director at SBI.

“If we had not cut savings rate, we would have had to raise our MCLR (marginal cost of funds-based lending rates). We also didn’t want to cut term deposit rates further. Hence, we decided to cut savings rate,” said Kumar.

Still, a cut in the savings rate would translate into lower incremental cost of funds going ahead. Since the MCLR is calculated taking into account the incremental cost of deposits, including those on savings account, this could lead to a fall in lending rates as well.

Kumar added that the bank will take a call on further cuts in the lending rate at the end of August, following RBI’s policy decision on 2 August. A Mint poll of 15 economists showed that 11 expect the central bank to cut the policy rate by 25 basis points.

“With the savings deposit rate cut, SBI has tried to cushion the impact on margins. Net interest margins have been under pressure due to diversification of risk to better-rated corporates, mounting bad loans and shifting of loans to MCLR. It is likely that other banks which have seen a hit on margins will follow suit,” said Saswata Guha, director, Fitch Ratings.

Bankers were a little more circumspect in committing to an immediate cut in savings bank rates, with some saying their asset-liability committees will take the call after RBI’s policy announcement.

Private sector banks, some of which boast better margins and are still building their savings account franchises, are unlikely to follow suit.

“Unlikely (to cut rates) in the immediate short term as we are seeing a convergence between term deposits and our savings accounts which are important for cross-selling retail products,” said Rana Kapoor, managing director and chief executive officer of Yes Bank Ltd. He said that given Yes Bank’s average cost of 6.1% on savings account deposits, there was tremendous room to cut in case it needed to improve margins.

The savings rate cut is expected to help SBI shore up its net interest margin. At the end of March, SBI and its associate banks had a total deposit base of Rs26 trillion, of which Rs9.4 trillion were current and savings accounts. The bank said that about 90% of the deposit accounts had savings balances of less than Rs1 crore. A back-of-the-envelope calculation shows that a 50 basis point reduction will result in savings in interest cost of around Rs4,200 crore.

The prospects of an earnings boost propped up the SBI stock. The bank’s shares gained 4.46% to close at Rs312.55 on a day the benchmark Sensex closed up 0.63% at 32,514.94 points.