India’s largest bank has bitten the bullet on making interest rates more pliable to changes in policy rates. State Bank of India (SBI) has linked the rate on the stickiest of its products, savings bank deposits, to the benchmark repo rate. The change applies to deposits exceeding ₹1 lakh in value.
It is natural that when SBI’s cost of deposits comes down, so would lending rates. Ergo, the regulator’s complaints on poor transmission seem to have been addressed.
SBI’s move to link its savings rate to the policy rate, at a time when the probability of an RBI rate cut is high, makes smart business sense. Margins may improve immediately and the fact that savings deposits are sticky will ensure SBI doesn’t lose its customers.
Analysts at Kotak Institutional Equities note that the difference between the current savings rate and the estimated repo rate-linked one has narrowed in recent times. “A variable interest rate does not necessarily mean a negative outcome for the customer as well," the firm said in a note.
In any case, the understanding is that savings accounts are a function of convenience and habit more than interest rates. But it may not be so simple and linear an argument.
The chart above shows that over the last five years, private banks have eaten into the market share of public sector peers in savings deposits. Incremental deposits are going to the likes of Kotak Mahindra Bank and Yes Bank, which offer higher interest rates than the 3.5% given by the remaining lenders.
Last week, SBI chairman Rajnish Kumar said in a television interview that 95% of its customers will not be impacted. However, by value, roughly one-third of the lender’s deposit base is estimated to get linked to the repo rate. That is because 80% of its savings deposits, which form 40% of its total deposits, will fall in the category of above ₹1 lakh, an SBI official told BloombergQuint.
Large savings deposits can be traced to high net worth individuals and corporations. They are not as sticky as the rest of the crowd. SBI’s market share in savings deposits has largely remained unchanged over the last decade.
The same cannot be said about its peers. Public sector banks have lost a massive 2.58 percentage points market share over the last five years and private banks have gained 5.54 percentage points. SBI, by the sheer size of its franchise, may be able to protect its base, but its peers will suffer, should they choose to follow.
The move towards market benchmarking of deposit rates has begun. It would be interesting to see if the historic trend of stickiness persists, or if public sector lenders become big losers.