If you hold a savings bank account with the State Bank of India with deposits under Rs 1 crore, then be prepared to get lower returns effective immediately. On Monday, the country's largest lender announced a two-tier system for savings bank account holders and reduced interest rates on accounts with a balance of Rs 1 crore or less to 3.5 per cent from four per cent.
This means that effective today, a majority of its savings account holders will earn 0.5 per cent lower interest rate on their deposits. Account holders with savings deposits in excess of Rs 1 crore will continue to earn an interest of four per cent. The SBI has close to 31 crore savings bank accounts.
“The decline in the rate of inflation and high real interest rates are the primary consideration warranting a revision in the rate of interest on savings bank deposits,” the SBI said in a statement.
The SBI further said that effective January 1, it had reduced the marginal cost of funds based lending rate (MCLR) by 90 basis points on the back of large inflows and in savings and current account due to demonetisation in November and December 2016. It said that the flows have since reversed and so the interest rate cut on savings deposits will help it maintain the key lending rate.
“There has been a significant outflow of CASA deposits since then (demonetisation period). The revision in savings bank rate would enable the bank to maintain the MCLR at existing rates, benefiting a large segment of retail borrowers in small and medium enterprises, agriculture and affordable housing segments,” it said.
The revision in interest rates on savings bank accounts comes just a few months after the state-owned lender had increased the monthly average balance requirement for savings account holders to Rs 5,000 for branches in six metros from April 1. For urban, semi urban and rural branches the monthly average balance requirement was set at Rs 3,000, Rs 2,000 and Rs 1,000, respectively.
SBI shares zoomed on Monday following the interest rate cut announcement; the stock was up four per cent at Rs 311.05 in afternoon trade on the BSE. Other bank stocks also rose, with the ICICI Bank, Bank of India, Bank of Baroda, up more than two per cent and the Punjab National Bank also trading around 1.6 per cent higher.
Lower saving deposit interest rates will help the SBI boost its margins in the coming quarters. Other banks usually follow the SBI in interest rate revisions. Now that the state lender has moved first in reducing interest rates on saving bank deposits of Rs 1 crore or lower, other banks could also follow suit and announce a similar structure.
Interest rate cuts (deposit as well as lending) could gain momentum if the Reserve Bank of India reduces the repo rate in its bi-monthly monetary policy announcement later this week.
Inflation in India has dropped significantly in recent months; Consumer Price Index inflation for June was at 1.54 per cent, its lowest since 2012 and much lower than the RBI's medium-term inflation target of four per cent. Therefore, many expect the central bank to reduce interest rates by around 25 basis points (0.25 per cent) this time around.
“RBI had revised down its inflation trajectory sharply in the June policy. Given that inflation reading has further surprised with sub-two per cent print (well below RBI’s own estimates), we find some room for RBI to be accommodative,” said Upasna Bhardwaj, economist at Kotak Mahindra Bank.
