Rajnish Kumar (Photo: Bloomberg)
Rajnish Kumar (Photo: Bloomberg)

SBI chief explains why banks cannot go beyond a threshold to cut deposit rates

  • India lacks social security schemes to bring down interest rates on deposits, said Rajnish Kumar
  • On rate transmission by banks, Kumar said when interest rate moves downwards then everybody starts talking and when it goes upwards nobody talks about it

New Delhi: SBI Chairman Rajnish Kumar on Saturday said banks cannot go beyond a threshold to bring down interest rates on deposits as India lacks social security schemes and likewise cannot lend at lower rates to corporates as the risk of default is too high.

On rate transmission by banks, Kumar said when interest rate moves downwards then everybody starts talking and when it goes upwards nobody talks about it.

When the repo rates were going up five-six years back, interest rates for borrowers did not increase in that proportion, he said.

In 2013, the repo rate was around 10 per cent, the SBI Chairman said adding that since 2013, Reserve Bank's repo and bank interest rates for consumers have been moving in a completely aligned manner.

"Secondly, we have repeatedly mentioned that banking system's dependence ...in India is largely on depositors. Today, 90 per cent of my deposit is retail deposit. If I want to lend money cheap, obviously I will have to pay less to depositors; and in a country like ours where there is huge population of senior citizens and in the absence of social security schemes, the interest on deposits is a source of earning," Kumar said while speaking at the 92nd Ficci Annual Convention here on the theme 'making financial system robust to aspire a USD 5 trillion economy'.

At present, banks largely offer 3 to 4 per cent interest on deposits in savings accounts, and charge borrowers 8 per cent and above rate on loans.

On getting competition from government saving schemes, he said such instruments do not impact the banks much as they still command huge share in the deposit market.

"We can't lower the interest rates (on lending) without lowering the interest rates for depositors. And there is a point, a threshold below which we cannot reduce the interest rate for depositors. Third thing is that the credit cost in the country is very high because the default rates are very high, so the spread has to be necessarily high," said the head of the country's largest lender.

The loss due to defaults is very high currently and in such a scenario the spreads have to be necessarily high to cover for the credit costs, Kumar added.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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