State Bank of India (SBI), India’s largest bank, will reduce interest rates on term deposits across various maturities by 25-50 basis points (bps) from Monday to bring down its cost of funds.
Since April, this is the fifth cut in term deposit rates effected by the bank, bringing the cumulative reduction to about 175 bps. The new rates will be applicable to fresh deposits and those that come up for renewal. The peak rate of 7.75 per cent will be offered for deposits of eight to 10 years.
The rate for deposits of one year to less than two years will be 6.5 per cent as against 7 per cent offered earlier. Today’s cut along with renewals of old term deposits at lower rates were expected to bring down the cost of deposits by 6-7 bps, said Chief Financial Officer S Ranjan.
SBI’s cost of deposit for 2008-09 was 6.30 per cent, up from 5.59 per cent for 2007-08. The bank has gone for an aggressive deposit rate reduction to protect its net interest margin (NIM), which has been under pressure due to high-cost deposits it contracted to fund credit growth in the last two-three years.
The bank had raised Rs 1,000 crore daily by offering 10.5 per cent annual interest rate on 1,000-day deposits to retail depositors in October 2008. Its NIM had declined to 2.93 per cent in 2008-09 from 3.07 per cent in 2007-08.
Since December last year, deposit rates have come down by up to 300 bps. In contrast, the benchmark prime lending rate has been cut by 150 bps. Bankers said while the room for an aggressive deposit rate cut was limited, it would remain subdued at least in the second quarter. Dhanalakshmi Bank CFO Bipin Kabra said the banking system was flush with liquidity and banks would like to reduce their costs.
Andhra Bank Chairman and Managing Director K R Kamath said deposits rates couldn’t be pushed down further.
