SBI to link saving deposits, loan pricing to repo rate from May 1

SBI is the first lender to announce a timeline to switch to an external benchmark

State Bank of India (SBI), the country’s largest bank, will use the Reserve Bank of India’s (RBI’s) policy repo rate as a benchmark to set the savings deposit rates and those for short-term loans from May 1 this year.

It is the first bank to announce a timeline to switch to an external benchmark. The bank’s decision to link its key pricing decisions on savings bank deposits and short-term loans to the repo rate will help it to address rigidities in the balance sheet and ensure a quick transmission of changes in the RBI’s policy rates, SBI said in a statement. It will link savings bank deposits with balances of more than ~1 lakh to the repo rate. The current effective rate on savings deposits is 3.50 per annum, 2.75 percentage points below the current repo rate of 6.25 per cent.

Term deposits will continue to be priced on the basis of market conditions, SBI Chief Financial Officer Prashant Kumar said.

Cash credit (CC) accounts and overdrafts (OD) of more than Rs 1 lakh will be linked to the repo rate (current repo rate 6.25 per cent plus a spread of 2.25 per cent). Risk premiums over and above this floor rate of 8.50 per cent would be based on the risk profile of the borrower, as is the current practice, SBI said.

Anil Gupta, vice-president and sector head, Financial Sector Ratings, ICRA, said banks were struggling to reduce their lending and deposit rates because deposit accretion continued to lag credit growth. Cutting deposit rates was not a feasible option for banks amid slowing deposits growth. He said the step would help a faster repricing of liabilities for banks and help in protecting their profit margins. More banks, especially public sector banks and a few large private banks, are expected to follow suit, he added. “This will be in line with the RBI requirement to link these rates to external benchmarks,” he said.

P K Gupta, managing director (digital and retail banking), said the 25-basis-point change (rise or fall) would have a 7-10 basis point effect on the marginal cost of fund-based lending rate (MCLR).

SBI will exempt savings bank account holders with balances up to Rs 1 lakh and borrowers with CC/OD limits up to Rs 1 lakh from this. This has been done to insulate them from the movement of external benchmarks, SBI said.

Last month, an Indian Banks’ Association-Ficci survey of bankers had flagged concerns on pricing loans and deposits using external benchmarks. It would bring volatility in interest rates because there could be frequent changes in customers’ monthly instalments, it said.  

Additionally, banks could keep spreads higher in the case of high volatility in benchmarks, the survey said.