Third cut in 45 days aimed at improving net interest margin.
In an attempt to improve its net interest margins (NIM), State Bank of India (SBI) today announced a further reduction in deposit rates, the third such move in the last 45 days.
The country’s largest bank has reduced term deposit rates by 25-50 basis points across maturities. The revised rates will take effect from May 18.
| THE CUT | ||
| Tenure | Existing Rates | Revised rates* |
| 15 days to 45 days | 3.75 | 3.25 |
| 46 days to 90 days | 4.75 | 4.25 |
| 91 days to 180 days | 6.00 | 5.50 |
| 181 days to less than 1 year | 6.75 | 6.50 |
| 1 year to less than 2 years | 7.50 | 7.25 |
| 2 years to less than 1,000 days | 7.75 | 7.50 |
| 1,000 days | 8.00 | 7.75 |
| 1,001 days to less than 3 years | 7.75 | 7.50 |
| 3 year to less than 5 years | 7.75 | 7.50 |
| 5 years to less than 8 years | 8.00 | 8.00 |
| 8 years and up to 10 years | 8.25 | 8.25 |
| * Effective May 18 Source: SBI | ||
In the last round of revision, effective May 4, SBI had cut deposit rates across various maturities by 25-50 basis points. The latest round of cuts come just days after the public sector lender said that its net interest margins, or the difference between earnings from loans and expenses on funds, fell by 14 basis points to 2.93 per cent at the end of March this year, as against 3.07 per cent a year ago.
During the fourth quarter of 2008-09, the bank’s NIM dropped by 22 basis points as it pruned lending rates by 150 basis points between November and January. While SBI had last reduced its benchmark prime lending rate in January by 75 bps, it has lowered deposit rates by 125-175 basis points so far in 2009 to bolster its NIM.
The pressure on margins has also made SBI reluctant to pare its benchmark prime lending rate further, while most public sector banks reduced lending rates at the start of the year.
For banks, the impact of the lending rate cuts is immediate, while the cost of funds goes down over a period of time. By raising over Rs 1,000 crore a day through its 1,000-day deposit scheme in the third quarter of the last financial year, SBI has seen a build-up in high cost resources, some of which was raised at 10.5 per cent, where the cost will only come down in the second half of the next financial year. For SBI, the cost of funds is still below 7 per cent.
Another cut possible
A senior SBI official said, “Advances are not picking up and we want to reduce the liquidity overhang. This decision (lowering term deposit rates) should help in improving the NIM over a period as the cost of funds comes down.”
Asked if there was room for a further cut in term deposits rates, he said there could be another 25 bps reduction. The business environment post the Lok Sabha polls will partly influence the bank’s decision, he added.
SBI chairman O P Bhatt had described the increasing cost of deposits as one of the main reasons for the fall in NIM. The bank expects the margin to improve by five to 10 basis points from June based on a strategy of “a calibrated reduction in deposits rates”. The bank is also looking to raise the NIM to 3 per cent at the earliest.
Sufficient liquidity in the system, coupled 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.
However, falling rates have also slowed the pace of deposit mobilisation. 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.
