Six years since the savings deposit rate was deregulated by the Reserve Bank of India (RBI), the country largest lender State Bank of India (SBI) has gone ahead and dropped the interest rate for savings accounts by 50 basis points to 3.5%. One basis point is one-hundredth of a percentage point.

The reasons for SBI to bite this bullet are obvious. The lender’s margins were getting squeezed after it witnessed a massive Rs1.5 trillion of deposits in just two months due to demonetisation. Having to pay a large sum of interest on these even as it began losing money due to non-payment of interest by delinquent borrowers along with a sharp deceleration in credit offtake, SBI had no choice but to bring its cost of funds down.

However, this is only part of the problem. SBI saw 60% of the demonetisation deposits move out, which increased its incremental cost of funds. Blame it on the new MCLR (marginal cost of funds-based lending rate) formula wherein banks have to consider the incremental cost of deposits rather than average cost of deposits. So SBI had the choice of either raising its MCLR or cutting the savings account interest rate. It chose the latter to avoid a further deceleration in already anaemic loan growth. Recall that the bank had cut its MCLR in January, emboldened by this deluge of deposits. More than 36% of SBI group’s deposit pile are savings and current deposits, and amount to Rs9.5 trillion.

Savings deposit rate is the stickiest interest rate in the economy and the inertia among banks is evident as it took six years for SBI to decide to prune it despite the rate being freed in 2011. What SBI is banking on is that the 40% of demonetisation deposits will remain with it and that since savings accounts are more of an operational tool than investment, the lender would not see a flight of customers to other banks that offer higher rates. The chart above shows that SBI would be right to think this way. In the last six years, private banks’ savings deposit base grew by 194% but that of SBI group grew by 123%. Will others follow? SBI’s public sector peers in all probability would but private lenders like Kotak Mahindra Bank Ltd or Yes Bank Ltd and even nascent payments banks may not as they still need to attract customers.

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