SBI cuts SB rates to 3.5% citing very high real interest rates (Eds: Updating with more quotes, information and background)

The nation's largest lender State Bank of India today slashed interest rate on savings deposits by 50 bps to 3.5 per cent on balance up to Rs 1 crore, citing "muted credit demand and very high real interest rates".
The new rate effective today is the lowest in the last six years, and comes just two days ahead of the Reserve Bank's third bi-monthly policy review and will impact over 90 per cent of its millions of small savings account-holders.
In April, the bank had increased a slew of service charges, such as non-maintenance of minimum balance, NEFT charges, for customers.

The move, which may lead to a rate ware, will help the bank make an additional gain of around Rs 2,500 crore.
SBI caters to over 42 crore customers of which nearly 2 crore use mobile banking. Around 3.27 crore are Internet banking users, 1.03 crore are State Bank Buddy users and 34.5 crore are debit card holders.
The market lapped the decision and ramped up the SBI counter. The stock closed 4.46 per cent up at Rs 312.55 on BSE against a 0.63 per cent gain on the Sensex.

The lender, however, will continue to pay 4 per cent on savings bank accounts with deposits of above Rs 1 crore, and this creates a two-tier savings bank account interest rate comes into effect from today.

The bank's savings account rate was 3.5 per cent during March 2003 to May 2011 for all savings bank account customers when the Reserve Bank freed the last vestige of administered interest rates.
Managing director in-charge of national banking Rajnish Kumar told reporters on a concall that the bank has around Rs 9.4 lakh crore in savings deposits and 90 per cent of which are under Rs 1 crore balance savings accounts.
The bank was paying 4 per cent interest rate on savings bank accounts since 2011, although the overall interest rate has come down and also the retail inflation, Kumar said.

"After many years, the real interest rate is trending at 2.75 per cent, which is very high given the muted credit growth as a result we are flushed with liquidity now," Kumar said refusing to quantify the exact quantum of excess liquidity.
He said this positive real interest rates comes to the system after eight years when it was trending up y 75 basis points. Under the present circumstances, he said the choice before the bank is to either raise the marginal cost of lending rates (MCLR) or cut savings bank interest rates.
"We did not consider it appropriate to raise the MCLR, because for lot of segments like agriculture, SMEs, retail housing, affordable housing, the cost and EMI would have gone up," he said, adding this revision would enable the bank to maintain the MCLR at the existing rates, benefiting a large segment of retail borrowers in SME, agriculture and affordable housing segments.

The lender has also encouraged customers to move to fixed deposit rates citing less volatility. "We encourage people to move to FDR as we expect less volatility and better facilitation due to our strong reach, and franchise network. Reduction in rates was also important as it was difficult to maintain MCLR at the current levels," he said further.
Deputy managing director and chief financial officer Anshula Kant said the bank has attracted Rs 1.5 trillion worth of inflows into these savings accounts during the note-bank period but 60 per cent of that have gone out of the bank now. While April-June saw an increase of Rs 24,000 crore into SB accounts, July saw over Rs 5000 crore decline in the same, she said.

Kumar said SBI was paying 4 per cent interest on savings deposits since June 2011, but before that for eight years it was paying only 3.5 per cent. The bank will however continue to offer 4 per cent interest on savings account balance of Rs 1 crore and above.
"The bank is introducing two-tier saving bank interest rate with effect from July 31. While balance above Rs 1 crore will continue to earn interest at 4 per cent per annum, interest at 3.5 per cent will be offered on balance of Rs 1 crore and below," SBI said in a regulatory filing.

It can be noted that the bank had in April steeply increased a slew of penal and non-penal charges on savings such as non-maintenance of minimum balance, NEFT charges among others.