SBI Chairman Says Banks Cannot Cut Deposit Rates Beyond A Certain Point
Rajnish Kumar, managing director of the national banking group at State Bank of India Ltd., speaks during a news conference in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

SBI Chairman Says Banks Cannot Cut Deposit Rates Beyond A Certain Point

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State Bank of India Chairman Rajnish Kumar on Saturday said banks cannot go beyond a threshold to bring down interest rates on deposits as India lacks social security schemes and likewise cannot lend at lower rates to corporates as the risk of default is too high.

On rate transmission by banks, Kumar said when interest rate moves downwards then everybody starts talking and when it goes upwards nobody talks about it.

When the repo rates were going up five-six years back, interest rates for borrowers did not increase in that proportion, he said.

In 2013, the repo rate was around 10 per cent, the SBI Chairman said adding that since 2013, Reserve Bank's repo and bank interest rates for consumers have been moving in a completely aligned manner.

"Secondly, we have repeatedly mentioned that banking system's dependence ...in India is largely on depositors. Today, 90 percent of my deposit is retail deposit. If I want to lend money cheap, obviously I will have to pay less to depositors; and in a country like ours where there is huge population of senior citizens and in the absence of social security schemes, the interest on deposits is a source of earning," Kumar said while speaking at the 92nd Ficci Annual Convention.

At present, banks largely offer 3 to 4 percent interest on deposits in savings accounts, and charge borrowers 8 percent and above rate on loans.

Also read: Banking Industry’s NPA Situation To Improve By Fiscal-End: SBI Chairman

On getting competition from government saving schemes, he said such instruments do not impact the banks much as they still command huge share in the deposit market.

"We can't lower the interest rates (on lending) without lowering the interest rates for depositors. And there is a point, a threshold below which we cannot reduce the interest rate for depositors. Third thing is that the credit cost in the country is very high because the default rates are very high, so the spread has to be necessarily high," said the head of the country's largest lender.

The loss due to defaults is very high currently and in such a scenario the spreads have to be necessarily high to cover for the credit costs, Kumar added.

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