BQ Explains: SBI’s New Deposit Rate Strategy Kicked In From May 1

State Bank of India is adopting a new interest rate strategy starting May 1. The move, which is intended to improve the pass-through of changes in India's policy interest rates to the end consumer, will impact some of the bank's depositors and borrowers.

The changes were announced in March but will kick-in now.

SBI, the country's largest lender, has over 430 million customers and holds 23 percent of the banking system's deposit base. As of December 2018, the bank had savings account deposits worth over Rs 10.6 lakh crore. About 80 percent of these deposits will be impacted by the rate change, the bank's managing director PK Gupta had told BloombergQuint in March.

Who Gets Impacted?

Customers with more than Rs 1 lakh in their savings bank accounts at SBI will see a drop in the interest rate.

Starting Wednesday, SBI will peg the savings account interest rate at 275 basis points below the prevailing repo rate. On April 4, the regulator cut the repo rate by 25 basis points to 6 percent. As such, the interest rate on savings accounts which hold more than Rs 1 lakh will drop by 25 basis points to 3.25 percent.

SBI is also changing the manner in which it calculates the interest rate on cash-credit accounts and overdrafts.

Cash-credit and overdraft above Rs 1 lakh will be priced at 225 bps over the repo rate. Over and above this, the bank will also charge a risk premium to the borrowers, depending on their risk profile. Smaller borrowers will not see an impact.

Who Does Not Get Impacted?

All account holders who hold less Rs 1 lakh in their bank accounts will see no immediate change in their deposit rates. Similarly smaller users of cash credit and overdraft facilities will also not be impacted.

Term deposit rates would also continue to be set individually and are not impacted by this change.

Loan customers will not be directly hit by the change but could see an indirect impact. As nearly 80 percent of the bank's savings deposits get re-priced, the cost of funds for the bank will fall.

This could help bring down the marginal cost of funds lending rate (MCLR) for retail and corporate borrowers. Most loan rates are linked to the MCLR rate.

Why The Change

The key reason behind SBI's decision is the push by the Reserve Bank of India to improve the transmission of policy rate changes. Often, while the RBI raises or cuts rates, end borrowers do not see the impact.

The RBI had initially suggested that banks link all floating rate retail loan products to an external benchmark. Bankers, however, opposed this and the proposal was put on hold.

SBI believes that it is important to first link deposits to an external benchmark. This, itself, would help policy rate changes transmit better to the end borrower.

The 15 basis point reduction in savings account rate would bring down overall lending rates by about 7-10 bps, which would be a direct benefit to its borrowers, the bank had said in March.

Why Did Other Banks Not Follow?

While smaller lenders like Federal Bank have had loan products linked to external benchmarks, a majority of the banking industry has not yet followed SBI's lead.

Some senior bankers, who spoke to BloombergQuint on condition of anonymity, said that they are watching SBI's experience. The decision to link savings deposit rates to an external benchmark could potentially impact deposit flows.

Also, at the current juncture, while the RBI has cut policy rates, banks have kept deposit rates high. This is because deposit growth has been lagging credit growth. As such, banks need to draw in more deposits right now. Any volatility in deposit flows could be counter productive for lenders.