Taking benefit of the abundant liquidity, State Bank of India, the country’s largest bank, has reduced the interest rate on domestic term deposits by 25 basis points across maturities. “There is lot of liquidity, while credit off-take remains subdued. This has provided us the opportunity to revise deposit rates,” a top SBI executive said.
The revised rate for its blockbuster 1,000-day deposit scheme will be lowered to 8 per cent from 8.25 per cent. Because of this scheme, and the high rates prevalent then, the bank was mopping up over Rs 1,000 crore a day by way of deposits in October and November 2008, which has now decreased to around Rs 500 crore a day.
While the new rates will be effective May 4, this is the second time in three weeks that the public sector lender has lowered deposit rates. On April 13, it had lowered term deposit rates by 25-50 basis points across maturities. While SBI had last reduced its benchmark prime lending rate in January, when it was cut by 75 basis points, it has lowered deposit rates by 100-150 basis points so far in 2009 to ensure that its net interest margin stays above 3 per cent. At the end of December, SBI’s net interest margin was around 3.15 per cent.
While the effect of a reduction in BPLR on the bank’s income is immediate, it takes banks longer to realise the benefits of a reduction in deposit rates as these are only revised for fresh deposits. With schemes like 1,000-day deposits, banks such as SBI are saddled with funds which can be re-priced only in the second half of 2011.
Sufficient liquidity in the system together with a reduction in policy rates has resulted in most lenders reducing deposit rates to ensure their margins stay healthy. Since October, deposit rates have come down by up to 300 basis points.
Punjab National Bank, the second-largest public sector bank, has been the most aggressive in cutting deposit and lending rates. It has reduced its deposit rate four times aggregating to 200-basis point since the beginning of 2009. The Delhi-based bank has lowered its peak rate from 9.5 per cent at the beginning of the year to 7.5 per cent now.
With rates coming down, the pace of deposit mobilisation has also decreased. The year-on-year growth in deposits moderated to 19.8 per cent at the end of March as against 22.4 per cent a year ago. The Reserve Bank of India has pegged growth in the aggregate deposits of commercial banks at 18 per cent for 2009-10.
