SBI's new scheme links deposit rates to base rate

State Bank of India’s (SBI) latest offering – to link deposit rates with base rate – is being viewed as a strategy to lure depositors in the current market scenario, when interest rates are moving upward. But bankers doubt if the product will still be accepted when the rate cycle changes.

On Monday, the country’s largest bank launched base rate-linked deposit products for one, three and five years. For one year, the rate will be 50 basis points (bps, 100 bps make one per cent) lower than the base rate. For three years, the deposit rate will be 25 bps lower and, for a five-year tenure, the deposit rate will be equal to the base rate. The scheme comes into effect from September 6.

The bank will also continue to offer fixed-term deposit rate schemes. At present, SBI’s base rate is 7.5 per cent. According to the Reserve Bank of India (RBI) norms, a bank will have to review the base rate at least once in a quarter.

SBI’s move to link deposit rates with the base rate comes at a time when the banking industry is facing slow growth in deposits due to unattractive rates. Deposit growth for the year to July 30 was 14 per cent, compared to 18 per cent projected by the central bank for the current financial year. Credit growth during the same period was 19.7 per cent, in line with RBI’s projection of 20 per cent for 2010-11.

According to a senior SBI official, the base rate-linked term deposit scheme has been introduced with two objectives. “One, understanding of this product needs some comfort with floating rates. So, it will be one additional investment product on offer for sophisticated customers in metropolitan areas. Second, it will offer some help in asset liability management, since deposit rates can be re-priced with any change in the base rate every quarter,” the official said.