In A First Since Deregulation, SBI Slashes Interest Rate On Savings Accounts

State Bank of India (SBI) on Monday introduced a two-tier interest rate structure for savings bank accounts, effectively slashing the rate of interest that most depositors will earn from here on. The move marks the first time that India’s largest bank has cut interest rates offered on savings account balances since the rate was deregulated almost six years ago.

Effective immediately, the bank will introduce a two-tier rate structure, it informed stock exchanges in a notification on Monday.

• Accounts with a balance of less than Rs 1 crore will now earn 3.5 percent on their savings account balances compared to 4 percent earlier.
• Accounts with a balance of more than Rs 1 crore will continue to earn 4 percent.

The Reserve Bank of India deregulated the interest rate on savings accounts in 2011. However, most large banks chose to stick to the 4 percent rate in order to protect their low cost deposit base. Even during times of tight liquidity conditions, banks held the savings account interest rates steady.

However, two things have changed over the past year, which have justified a relook at the rate.

The level of inflation in the economy has fallen, allowing depositors to earn higher real interest rates on deposits. In addition, the government’s decision to announce demonetisation in November last year has led to a flood of deposits into the banking system. Nearly 60 percent of the deposits that came into the system have proved to be sticky, RBI Deputy Governor SS Mundra told BloombergQuint in an interview earlier this month.

In SBI’s case about 40 percent of nearly Rs 1.5 lakh crore in deposits received during the demonetisation period between November 8 and December 31 have stayed with the bank, said Anshula Kant, chief financial officer at SBI on a conference call on Monday.

While surplus liquidity conditions in themselves justify a drop in the deposit rate, SBI chose to argue that the cut was intended to ensure that the bank does not need to hike its lending rates. As demonetisation deposits have flown out, the marginal cost of funds for the bank has risen, argued SBI.

Banks currently follow a marginal cost lending rate (MCLR) formula where the rate is determined by the incremental cost of deposits rather than the average cost of deposits.

What This Means For SBI

At the end of the March 2017 quarter, SBI and its associates together had a deposit base of more than Rs 26 lakh crore. Of this, savings account deposits accounted for Rs 9.4 lakh crore.

Roughly 90 percent of these deposits would be in accounts which hold less than Rs 1 crore and hence will be impacted by the deposit rate cut, said Kant.

Repricing on this large pool of deposits will bring down the cost of funds for the bank, in turn boosting net interest margins (NIMs). The bank declined to spell out the margin impact since its quarterly earnings are due shortly.

However, the bank may also need to reduce its MCLR further when it reviews lending rates next since its incremental cost of funds may also come down. A call on lending rates would be taken at the next meeting of the asset liability committee (ALCO) in August, said Rajnish Kumar, managing director in-charge of national banking at SBI.

When asked whether a cut in the savings account interest rate could hasten the outflow of deposits to other financial assets, Kumar said that the bank does not expect that to happen since savings accounts are 'utilities’, where convenience is a more important factor compared to interest rates.

In response to savings account rate cut, shares of SBI surged and closed higher by 4.5 percent at Rs 312.55 per share on the BSE.

Will Other Banks Follow?

SBI’s decision to pare down its savings account deposit rate could push other banks into considering the same. Surplus liquidity, coupled with weak credit growth, means that banks are well placed to cut deposit rates if they choose to.

Bankers that BloombergQuint spoke with said they would consider SBI’s decision at the meetings of their respective asset liability committees (ALCO).

“We have just received this news. Our ALCO is set to meet today. We will discuss this move there,” P.S. Jayakumar, chief executive officer (CEO) of Bank of Baroda told BloombergQuint on the phone.

Rajkiran Rai, CEO of Union Bank of India echoed that and told BloombergQuint that the lender would take a decision within a week.

For Indian Overseas Bank, too, about 90 percent of savings deposits are in accounts with balances less than Rs 1 crore.

"SBI's decision is probably indicative of where the market is going to move. Our ALCO meeting will happen in the first week of August, when we will take a call on the matter,” said R Subramaniakumar, CEO at Indian Overseas Bank. He added that banks would also take the RBI’s monetary policy decision, due on Wednesday, before taking a call on rates.