State Bank of India (SBI) cut its deposits rates for fresh funds across segments on Monday, in view of the falling interest rate scenario and surplus liquidity.
The term deposit rates will be 20 basis points (bps) lower for retail customers and 50-75 bps lower for deposits up to 179 days. For bulk deposits of Rs 2 crore and above, the rate cut would be as much as 35 bps. The new rates are effective August 1.
This would mean lending rates would be cut sharply, too. This will then pass through the cumulative 75 bps rate cuts by the Reserve Bank of India (RBI). And SBI’s move is likely to be followed by other banks. “SBI is the leader. Once SBI does something on rates, others will have to follow,” said Ananth Narayan, associate professor, finance at SP Jain Institute of Management and Research.
However, lenders can lower deposit rates at their discretion, based on competition, and that automatically brings down the MCLR (marginal cost-based lending rate) for banks. As SBI has lowered deposit rates, others will follow, and this will bring down the MCLR for fresh loans.
ICICI Bank executive director designate Sandeep Garg has said the bank’s MCLR was lowered a fortnight back and the bank will move according to the composition formula of the MCLR. As and when the linked cost of funds or market rates come down, the MCLR will have to be lowered.
In a recent meeting with public sector bank chiefs, RBI Governor Shaktikanta Das had prodded banks to cut rates. The governor is meeting private sector bank chiefs this week and will press for more rate cuts.
In an interview with Business Standard, Das had said: “Consequent to the rate cuts by the RBI, the accommodative stance, the hugely surplus liquidity in the system right from June 1, and yields on government securities coming down by over 100 basis points since the first policy rate cut in February, banks should pass on the rate benefit to customers.”
“The conditions are absolutely conducive for faster transmission of interest rate cuts, I repeat, at least for new loans,” Das said, adding for old loans the transmission may take more time.
SBI has reasons to cut its deposit rates. The banking system had a liquidity surplus of Rs 1.26 trillion as on July 26, compared with nearly Rs 1 trillion deficit a few months back. Particularly for SBI, the certificates of deposits (CD) have come down quite sharply.
“What is the best market indicator for funding rates? SBI’s CD rates have come down by more than 100 bps since May. The Treasury bills have come down by 200 bps since December. By comparison, the deposit rates have not really come down. We don’t know whether this will hit the savings, but everyone was expecting the banking system to lower lending rates, which will follow the deposit rate cuts,” said Narayan.
Following the rate cuts, deposits between 7 days to 45 days will give a return of 5 per cent, from 5.75 per cent earlier. One year to less than two years will give rates of 6.8 per cent, from 7 per cent earlier. The most popular basket, that of two years to three years will offer interest rate of 6.7 per cent, from 6.75 per cent earlier. For senior citizens, this basket will offer 7.3 per cent, from 7.5 per cent earlier. For five years and up to 10 years, the deposit rates offered would be 6.5 per cent, from 6.6 per cent earlier. For senior citizens, the rates have been revised down to 7 per cent, from 7.1 per cent earlier.