Less than a week after the Reserve Bank of India (RBI) lowered policy rates, the State Bank of India (SBI) on Wednesday cut lending and deposit rates citing adequate liquidity situation.
The country’s largest bank reduced the marginal cost of funds based lending rate (MCLR) by 10 basis points (bps) across tenures. The one-year MCLR, therefore, stands reduced to 8.05%. The new rate may not be applicable to existing home loan borrowers immediately unless these loans are set for a one-year reset clause.
SBI also cut interest rates on its saving accounts for balance below ₹1 lakh to a historic low of 3.25%. The new interest rates on savings deposits will be effective from 1 November. The bank also reduced interest rates on retail term deposits and bulk term deposits by 10bps and 30bps, respectively, for 1 year to less than 2 years’ tenor. The new fixed deposit rates will be effective from 10 October 2019.
Two years ago, SBI was the first bank to cut savings deposit rate by 50bps to 3.5%. Soon others followed suit. Most banks currently offer 3.5% interest on savings deposits up to ₹50 lakh. Small and mid-sized private sector banks such as IDFC First Bank offer a 6% rate on savings accounts with balance less than ₹1 lakh. RBL Bank offers a 5% rate.
In May this year, SBI had introduced repo linked savings account for balance above ₹1 lakh, while interest for balance up to ₹1 lakh was retained at 3.5%. At the current repo rate of 5.15%, this would mean a meagre 2.4% on such deposit rates. However, to avoid pain to depositors, SBI had capped the minimum rate on savings deposits at 3%.
“SBI’s move to bring down the savings deposit rates is aimed at bringing down overall cost of funds. It will help banks to partially protect their net interest margins (NIMs). Other large banks with higher casa (current and savings account ratio) are also likely to follow suit with a reduction in savings account deposit rates," said Asutosh Mishra, head of research, Ashika Institutional.
SBI aims to safeguard its margins from the impact of introduction of external benchmark linked retail loans, through a reduction in the savings interest rate. Under the repo linked loans, the loan rate is adjusted as and when RBI revises its benchmark rate. In its recent policy announcement, the central bank hinted at the possibility of further rate cuts after stating that it will maintain accommodative stance till growth revives. This would mean that lending rates will get repriced much faster than deposits, putting pressure on bank margins.
On 1 October, SBI had introduced repo rate linked home loan scheme for new customers. Under this scheme, SBI charges a spread of 265bps over RBI’s repo rate (currently at 5.15%) to calculate its external benchmark-based lending rate. SBI also charges a premium for effective home loan rate to maintain its margins.