How RBI rate cut to impact SBI saving deposits - What State Bank of India depositors should know
SBI last month linked saving deposits, cash credit and overdraft above Rs 1 lakh with repo rate, while giving a breather to below Rs 1 lakh balance borrowers and depositors.
The moment RBI trimmed down policy repo rate by another 25 basis points, all eyes shifted towards the largest lender State Bank of India (SBI). This is because SBI is the only bank which took a new turn, by not only linking saving deposits but also short term loans with repo rate. Linking deposits and short term credit with repo rate, would mean any change in this RBI policy rate either hike or cut will have direct impact. While SBI borrowers will have good news with rate cut, but the real question is of how the saving deposits customer will see their interest rates post policy. SBI last month linked saving deposits, cash credit and overdraft above Rs 1 lakh with repo rate, while giving breather to below Rs 1 lakh borrowers and depositors. Now policy repo rate has shifted from 6.25% to 6%. Therefore, here’s how one can expect the rate cut impact on SBI depositors.
Firstly, SBI has now kept all cash credit accounts and overdrafts with limits above Rs 1 lakh linked with repo rate 6.25% with a spread of 2.25%. This would mean now borrowers who seek such loans will see a 8.50% interest rate. With repo rate at 6% from previous 6.25%, ideally SBI’s short term loan should also see the similar change.
On the other hand, SBI linked savings bank deposits with balances above Rs 1 lakh to repo rate with the current effective rate being 3.50% per annum. This would be 2.75% lower from the policy repo rate of 6.25%. Notably, 3.50% interest rate remains unchanged currently.
So this means, RBI’s rate cut should bring down savings bank deposit above Rs 1 lakh interest rate also down by 25 basis points to 3.25%. But should SBI follow this?
Well SBI has made its move shocking depositors. In a notification, the bank said that, since SBI also having linked its SB rates to the repo rate, the saving bank rates shall also stand revised as under w.e.f 1st May 2019.
That means, now saving deposits up to Rs 1 lakh will continue to enjoy 3.50% interest rate per annum. However, for balances above Rs 1 lakh, the interest rate will be now 3.25% - lower by 25 basis points compared to previous earlier 3.50%. With SBI, cut in saving deposits interest rate, other lenders savings account will become attractive.
Talking about rate cut impact on saving deposits, Emkay said, “The cut in Repo rate will have an impact of lower savings bank (SB) deposit rate for SBI (may be followed up by other banks), thereby potentially creating scope for a spread expansion in legacy lending accounts. However, since the systemic liquidity is in deficit, lower SB rate can lead to some cannibalization. Hence, the effective gains on spreads may be fairly limited, in our view.”
But what many are not aware is that, RBI’s current rate cut impact will not be immediately seen in SBI’s saving deposits above Rs 1 lakh. That is because, SBI’s 3.50% interest rates on savings deposit below 2.75% of repo rate from earlier 6.25%, will come into effect from May 2019. Simply put, currently one may not witness any reduction in SBI’s saving deposit schemes, however, further rate cut in upcoming policies can give more clarity.
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In CLSA’s view, the conundrum that banks may face is the need to raise deposits where the growth of 10% YoY has lagged credit growth of 15%, and non-bank channels (bonds, NBFCs) are still struggling to grow due to weak inflows. SBI’s move to link rates on savings deposits (above Rs0.1m) to the repo rate will drive faster repricing of deposit and support transmission; other banks may follow suit.
When SBI had decided to link policy repo rate with its above mentioned two schemes, M B Mahesh, Nischint Chawathe, Dipanjan Ghosh and Shrey Singh analysts at Kotak Institutional Equities said, “ SBI responded to the regulator’s desire for products which have faster transmission of rates by selectively introducing repo linked savings and cash credit products. Prima-facie, a variable interest rate is a positive outcome as it lowers NIM volatility as banks have one less variable to worry about, but the impact of this move would be well understood once we establish savings behavior during various rate cycles and reaction from competitors.”
Hence, the RBI rate cut impact will not be witnessed anytime soon, but experts already believe there are more room for further downward revision in policy, which can have its own version of shocks on saving deposits.
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