State Bank of India (SBI) will cut deposit rates by 25 basis points across all maturities except for the lowest slab (15 days to 46 days).
SBI would thus joins Union Bank of India, Bank of Baroda, Bank of India and Punjab National Bank, which have pared deposit rates by 25 to 50 basis points in the wake of falling yields in government securities.
The asset-liability committee of SBI recently took stock of the situation arising our of the sliding gilt yields and felt that a rate cut was necessary to protect net interest margins (spreads). The cut is expected to take effect from the next week.
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The scenario arising out of falling interest rates -- where banks raise funds (cost of deposits) at 7.5 per cent on an average and invest in low-yielding government securities in the absence of credit offtake -- is clearly unsustainable, senior bankers said.
Normally, public sector banks await the SBI to make the first move as far as cutting/ raising deposit rates and the prime lending rates is concerned. But, this time round, slipping government security yields has forced public sector banks to take a hard look at the asset-liability mismatches, and they went ahead with cuts in deposit rates.
"Deposit mobilisation has been good for banks this fiscal in view of the retail investors losing confidence in the stock markets and mutual funds. But, the problem of plenty has afflicted most banks as they are not able to productively deploy the funds so raised," said a senior banker.
Senior bankers feel their hands are tied as far as the deposit rate cuts go. A massive cut in deposit rates may trigger flight of deposits who will look for other investment avenues like small savings scheme and the Reserve Bank of India's tax-free 8.5 per cent Relief Bonds which offer higher tax-free returns.