Customer response is the key as SBI links deposits, loans to repo rate

The bank will service its savings bank account holders with over Rs 1 lakh of outstanding balance an interest 2.75 per cent lower than the ruling repo rate

Reacting positively to its new pricing strategy, the stock of State Bank of India (SBI) rose nearly 2 per cent on Monday.  In the latest move, the bank seeks to link its interest rate to the external benchmark rate for certain assets and liabilities. The new pricing strategy, which was announced on Friday (post market hours), will be effective from May 1.  

The bank will service its savings bank (SB) account holders with over Rs 1 lakh of outstanding balance an interest 2.75 per cent lower than the ruling repo rate. Likewise, small borrowers -- those availing of cash credit and overdraft facilities of above Rs 1 lakh -- will be charged a premium of 2.25 per cent over the repo rate. The repo rate or the rate at which the Reserve Bank of India lends to commercial banks currently stands at 6.25 per cent. 

 

No immediate impact is anticipated on SB accounts that currently earn 3.25 per cent interest. However,  as 80 per cent of SBI’s SB accounts (totalling to Rs 10.6 trillion) have a balance over Rs 1 lakh, nearly 30 per cent of its deposits are likely to be reprised lower by 20–22 basis points (bps) on further repo rate cuts, according to ICICI Securities’ estimates. On the lending side, spreads are expected to increase by 10–15 bps. 

With both sides of the balance sheet positively impacted, analysts at Morgan Stanley say this should reduce margin volatility over time. However, SBI’s move comes at a time when banks — mostly private banks — have become aggressive on deposits. Recent data indicates private banks are steadily increasing their deposits market share at the cost of public sector banks (PSBs). SBI is just about maintaining its market share in incremental deposits at 25 per cent which has also been quite volatile in recent quarters. Also, at 3.25 per cent SB interest rate, SBI offers the lowest returns to its deposit holders.  That said, with over Rs 10 trillion in SB accounts, SBI leads the segment. 

 

Whether the latest move would give the bank enough teeth to expand its deposits base needs to be seen. Unlike term or current account deposits, large SB deposits aren’t too sticky and account holders tend to be watchful over their interest income. Analysts at Kotak Institutional Equities say banks have been hesitant to introduce these products for fear of losing market share on deposits. “So, we would wait for two more years to understand the acceptance of this product,” they add.  The brokerage points out that this is SBI’s second attempt to tinker with deposit rates and the earlier attempt to offer variable interest rates on term deposits found limited acceptance. 

Banks, however, have little time to adopt new benchmarking standards for retail loans, with the April 1 deadline only a few weeks away.

Though SBI’s strategy is certainly first of its kind, will it be popular among peers? An analyst with a foreign brokerage says:  “While PSBs could adopt SBI’s technique, private banks may go slow.” 

ICICI Securities notes that banks may find SBI’s benchmarking tough in a rising interest rate scenario as passing on hikes and paying higher on savings deposit may become difficult. Also, with the direction of the repo rate quite unpredictable at present, analysts say it may be premature to work out possible gains from SBI’s new interest rate pricing model.