State Bank of India (SBI) today announced a 25 basis points reduction in deposit rates across maturities as part of its latest attempt to lower cost of funds and improve its net interest margin (NIM).
The latest revision, effective from Monday, is the sixth deposit rate reduction by the bank during the current financial year. This does not include the bank's move to terminate its blockbuster 1,000-day scheme that helped it mop up over Rs 1,000 crore a day during the peak of the financial crisis.
In a statement, SBI said that it would offer 6.25 per cent on one-two year deposits, while the peak rate of 7.50 per cent would be available for 8-10 year funds. Since April, the peak rate has dropped by 100 basis points.
A senior SBI executive said that one way to lower the pressure on deposits was to bring down the cost of funds, therefore, the bank has decided to cut deposit rates. Besides, with abundant liquidity in the system, there was not much pressure to raise resources. "This offers us room to prune costs when the credit demand remains weak to provide interest income," he added.
SBI is grappling with a fall in NIM, which fell by 73 basis points to 2.30 per cent at the end of June 2009 from a year ago. The bank has said that it wanted to increase its NIM to above 3 per cent levels. The bank expected its margin to improve by four-six basis points during the second quarter. With the bank mopping up high-cost funds during the peak of the financial crisis last year, its cost of deposits moved up to 6.16 per cent at end of June this year from 5.71 per cent a year ago.
Bank executives said that the 1,000-day scheme, which was also adopted by others such as Union Bank of India, had helped attract retail customers who tend to be more loyal than the corporate customers. The large fund mop-up is expected to help the bank retire high-cost bulk deposits raised from companies.