Quicker transmission

SBI does a first, opens new window

The State Bank of India’s (SBI’s) decision to link its savings deposit rate and pricing of short-term loans to the repo rate is a prudent move because it is expected to enable a quicker transmission of interest rates. For long, successive cuts by the Reserve Bank of India (RBI) of its key policy rate have not been passed on in equal measure to borrowers, and the reason for this is banks have not been in a position to reprice their deposits all at once. So far, banks have been linking interest rates to their own cost of funds.

The country’s largest bank has voluntarily linked the interest rate it offers on savings bank deposits of over Rs 1 lakh to the repo rate, which now stands at 6.25 per cent. Starting May 1, savings deposits will earn interest at 2.75 percentage points below the repo rate. The share of such deposits as a percentage of SBI’s total deposits is significant at 33 per cent; in effect, the bank will now price this corpus of its deposits on a floating-rate basis. On the lending side, cash-credit accounts and overdrafts over Rs 1 lakh have also been welded to the repo rate plus a spread of 2.25 per cent. The threshold of Rs 1 lakh on both the deposit and lending side is to ensure that smaller savers and borrowers are not penalised — due to cut in the repo rate in the case of former, and a hike in the case of the latter. It is now near-certain that other bigger banks will follow suit as they can improve and reduce the volatility in their interest margins.

What needs to be seen is just how mutual funds and insurance companies react to this measure. In the recent past, banks’ retail-term deposits have not grown as fast as before, especially after the huge one-off surge seen in the post-demonetisation phase. A good chunk of those who were earlier retail-term depositors now opt to invest in physical assets — housing and gold; and in offers from both mutual funds and tax-saving insurance schemes. This is a key reason why banks’ reliance on borrowings (non-deposits), in general, went up by over 30 per cent in FY18 from just 11 per cent in the preceding year. While current and savings bank deposits (Casa) continue to account for 42 per cent of total deposits, it remains to be seen how larger investors in them now react after a cut in the repo rate. This was the key reason why banks were also reluctant to cut deposit rates — be they on savings or retail-term. Some also say that the move may face some resistance from depositors at a time when the inflation trend is downward, and it would have been better to wait for a cycle where interest rates are going up so that customers get used to the structure.

But successive RBI governors have grappled with the issue of the weak transmission of interest rates by banks. All previous efforts targeted the lending side of the game — be it the base-rate regime or marginal cost-based lending rate. The trouble was that it did not address the fact that only new borrowers stood to gain, and in any case, the issue of stubborn deposit rates was not tackled at all. SBI’s voluntary move has opened a new window.