SBI cuts savings deposit rate by 25 bps; other banks likely to follow

Term deposits for certain tenures also slashed by 10 basis points to 30bps

sbi [File] Representative image

The country’s largest lender State Bank of India has reduced interest rates on savings bank deposits to 3.25 per cent from 3.50 per cent, while term deposits for certain tenures too, have been slashed by 10 basis points to 30 basis points.

“In view of the adequate liquidity in the system, SBI has announced revision in interest rate on savings bank deposits (with balances upto Rs 1 lakh) from 3.50 per cent to 3.25 per cent with effect from November 1, 2019,” the state-owned lender said on Wednesday. For savings bank deposits with balances of over Rs 1 lakh, SBI had already linked the interest rates with the repo rate (275 bps below repo rate) from May 1. 

Meanwhile, SBI has also reduced its retail and bulk term deposit rates for a tenor of one year to less than 2 years by 10 bps to 30 bps from October 10.

The move follows the Reserve Bank of India (RBI) reducing its repo rate for the fifth consecutive time last week. The central bank reduced the benchmark rate, at which it lends banks, by 25 basis points to 5.15 per cent. Overall, the RBI has now reduced the repo rate by 135 bps this year.

Despite the repo rate cuts, banks have been slow in transmitting the lower rates on its borrowers. In this backdrop, the RBI recently mandated all banks to launch loans linked to external benchmarks like repo. Since then, most banks have launched home and auto loans, among other products, that are linked to the repo rate. However, most of the existing borrowers are still on loans linked to marginal cost of funds-based lending (MCLR) or the even older base rate. For these customers, the transmission has been slower. 

The gap between outstanding and fresh lending rates rose 10 bps month-on-month in August to 75 bps.

On Wednesday, SBI cut the MCLR across tenures by 10 bps. This is the sixth consecutive cut in MCLR in the current financial year and will bring the one year MCLR to 8.05 per cent. 

Deposits account for a major source of funds for banks. Unless deposit rates are lower, lending rates will not fall, given that banks also have to look at their net interest margins.

According to the latest RBI data, the weighted average term deposit rates were largely flat (up just 10 bps) at around 6.85 per cent in August. This is despite the repo rate cuts this year. 

After RBI governor Shaktikanta Das raised his concerns over the slow transmission of rates, banks have stepped up the pace of term deposit as well as lending rate reductions since September. “We have started to see banks, especially private banks, cutting headline deposit rates in recent months. The gap between repo and term deposit rates has started to converge even as banks have struggled in recent times to manage their deposit mobilisation activities,” said M.B. Mahesh, analyst at Kotak Institutional Equities.

Lending rates are also likely to see declines going forward, with most banks having cut MCLR by 10 bps to 20 bps in the past one month and as new loans are linked to external benchmarks, he said.  

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