A State Bank of India Ltd. (SBI) building stands illuminated at night (Photographer: Dhiraj Singh/Bloomberg)

SBI Links Interest On Most Savings Account Deposits To RBI Repo Rate

State Bank of India, the country’s largest lender, has become the first domestic bank to link the interest rate it offers on savings account deposits to an external benchmark — the Reserve Bank of India’s repo rate. By doing so, the bank will effectively link all loan rates to an external benchmark either directly or indirectly, thereby attempting to speed up the transmission of any changes in the benchmark monetary policy rate to depositors and borrowers.

In a statement on Friday, SBI announced the following changes:

  • Savings accounts with deposits above Rs 1 lakh would be priced at 2.75 percent below the prevailing repo rate of 6.25 percent. The effective rate works out to be 3.5 percent, which is unchanged from the prevailing rate on savings accounts. However, hypothetically, if the policy rate were to be cut by 25 basis points, the interest rate on the savings account would also fall by a similar amount.
  • Cash credit accounts and overdraft facilities over Rs 1 lakh would be priced at 2.25 percent over the repo rate. At the prevailing repo rate of 6.25 percent, this would mean a floor price of 8.5 percent. The bank would charge a risk premium over the floor rate, depending on the credit quality of the borrower.
  • For all other floating rate products, including retail and corporate loans, the impact of SBI’s decision to link savings account deposit rates to the repo rate will be felt indirectly. These loans will continue to be linked to the 1-year MCLR (marginal cost lending rate). However, since the bank’s cost of funds will now move immediately after a policy rate change, the MCLR too will adjust quicker than it does now. The result will be a 7-10 basis point impact in floating rate loans for every 25 basis point change in policy rates.
  • For savings account holders with balances up to Rs 1 lakh and borrowers with cash credit and overdraft limits up to Rs 1 lakh, interest rates will remain fixed.

The new rates will be effective from May 1. About 40 percent of the bank’s deposits are in savings accounts, explained PK Gupta, managing director at SBI. 80 percent of these deposits by value are in accounts with balances more than Rs 1 lakh, Gupta said. This means about 32 percent of the bank’s total deposits will be impacted by the new rules.

About 80 percent of our total savings deposit book consists of deposits over Rs 1 lakh. So this will impact a lot of our customers. Moreover, while calculating marginal cost lending rates (MCLR), savings deposits have a 40 percent weightage, so this linking will also have a bearing on our overall loan book.
P.K. Gupta, Managing Director, SBI

Why The Change?

The move from SBI comes after a long period of discussion between banks and the regulator on improving the transmission of policy rate changes to the end borrowers and depositors. Without effective transmission, the impact of monetary policy on the economy is blunted.

In December 2018, the RBI asked banks to link all floating rate retail loan products to an external benchmark starting April 2019. The regulator’s suggestion was different from what SBI has announced. As part of its recommendations, the RBI suggested linking lending rates to an external benchmark before deposit rates.

SBI has done the reverse.

In explaining its decision, SBI said the move will “address the concern of rigidities in the balance sheet structure and address the issue of quick transmission of changes in RBI’s policy rates."

Gupta told BloombergQuint that linking lending rates alone to an external benchmark could have led to difficulties in asset liability management for banks. In contrast, linking deposit rates to an external benchmark will mean that both assets and liabilities will move in tandem in response to a move in the benchmark.

If policy transmission has to happen, both sides of the balance sheets have to be linked to policy rates. Best way to do policy transmission is to link savings bank rate to the policy rate. This gives us flexibility to do policy transmission on asset side as well.
PK Gupta, Managing Director, SBI

Will Other Banks Follow?

While SBI has been the first to link deposit and lending rates to an external benchmark, other large banks may follow suit.

According to a senior official at the Indian Banks Association, the banking regulator in meetings with bankers had asked that lenders move to link lending rates to an external benchmark quickly. The IBA is also working with credit bureau CIBIL to devise an external benchmark, which would be more effective than the repo rate and less volatile that treasury bill rates, the official said, on conditions of anonymity.

In its December announcement, the RBI had said that banks could link floating rate products to the RBI’s repo rate, the 91-day treasury-bill yield, the 182-day treasury-bill yield or any other benchmark market interest rate produced by Financial Benchmarks India Pvt. Ltd.

Linking the savings deposit rate with policy rate will help in 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.  
Anil Gupta, Sector Head - Financial Sector Ratings, ICRA