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MUMBAI: State Bank of India (SBI) late Friday sought to bring its lending and deposit rates in kilter with the benchmark central bank rate at which it loans money to high-street lenders, indicating a quicker reflection of the broader monetary policy on the traditional credit market.
Interest rates on deposits above Rs 1 lakh and overdrafts of similar amount would now be tied to the repo rate, a key Reserve Bank of India (RBI) tool for setting broader interest rate directions.
The nation’s largest lender said late evening that from May, all savings bank deposits and short-term loans above Rs 1 lakh will be linked to the RBI’s benchmark repo rate.
The repo rate is currently at 6.25 per cent.
While savings bank rates will start at a 2.75 per cent discount to the repo rate, the lender will charge a premium of 2.25 per cent on short-term loans above Rs 1 lakh.
“The risk premiums over and above this floor rate of 8.50 per cent would be based on the risk profile of the borrower, as is the current practice,” SBI said in a statement.
SBI’s move comes after RBI Governor Shaktikanta Das met with bank CEOs, seeking swifter transmission of policy rate cuts.
The RBI had reduced its repo rate by 25 basis points to 6.25 per cent last month.
This is the first time that a bank has directly linked its savings rates, small retail loans, and deposit rates to the RBI’s policy rates.
“Despite a recent cut in repo rate, banks were struggling to reduce their lending and deposit rates as the deposit accretion continued to lag credit growth.
Cutting deposit rate was not a feasible option for banks amid slowing deposit growth,” said Anil Gupta, head-financial sector ratings, ICRA.
“Linking the savings deposit rate with policy rate will help faster repricing of liabilities for banks and help in protecting their profit margins.
We expect more banks especially all the public sector banks and few large private banks to follow the move by linking their deposit and lending rates to repo rate which will also be in line with RBI requirements to link these rates to external benchmarks,” Gupta added.
Transmission has been a thorny issue for long.
Currently banks calculate their lending rates based on a so-called marginal cost of funds-based lending rate or MCLR, which links lending rates to the deposit rates of banks.
However, deposit rates are also governed by the government savings rates, meaning transmission is distorted.
Higher deposits rates mean that lending rates are also not lowered as swiftly.
An October 2017 report by an RBI committee to review the MCLR)recommended linking bank lending rates to a market benchmark to hasten monetary policy transmission and improve transparency in rate setting by lenders.
A decision is yet to be taken on the report.
It remains to be seen whether other banks follow SBI in linking their savings and short-term lending rates to the repo.
