SBI cuts peak deposit rate

Bank realigns interest rates to neutralise CRR hit.

State Bank of India (SBI), the country's largest bank, has reduced its peak rate on deposits by 25 basis points to 9.25 per cent. It has, however, raised by the 25 basis points the interest rate on deposits for 271 days to less than one-year, as well as those over 3 years.

The bank has reduced the rate on the SBI Smart Deposit Scheme for 550-day deposits from 9.5 per cent to 9.25 per cent, effective August 9.

This is a smaller reduction than the 50 basis points cut on one-year deposits to 9 per cent by public sector banks like Canara Bank, Bank of India and Bank of Baroda last week.

Finance Minister, P Chidambaram, had during a meeting with the chairmen of public sector banks recently opined that with headline inflation at 4-4.5 per cent, an interest rate of 9.5 per cent on one-year deposits was not justified, and indicated that rates on these deposits should not be more than 8.5 per cent.

The minister asked banks to look at bringing down the cost of deposits to protect their margins and not to increase lending rates, following a 50 basis-point hike in the cash reserve ratio to 7 per cent by the Reserve Bank of India (RBI).

"We are able to give a 25 basis points premium for competitive advantage in keeping with our cost of funds and margins," a senior SBI official said.

SBI has also reduced the interest rate on its super-saver term deposit scheme for 4 to 5-year deposits by 25 basis points to 9.25 per cent. The bank has decided to continue with the special deposit schemes offering 9.25 per cent till further notice.

SBI, which earlier offered a flat rate of 8.25 per cent on deposits over one-year, has now split them into three categories:

8 per cent for deposits of one year upto 2 years

8.25 per cent for 2 years upto 3 years, and

8.5 per cent for 3 years upto 10 years.

"We need longer-term deposits as we are financing infrastructure projects," the bank's official said. The higher rates for term deposits had pushed up the bank's cost of funds by 56 basis points to 5.35 per cent from the year ended March 2007.

This was offset by a 113 basis point increase in yield on advances and the bank was able to maintain its net interest margin at 3.31 per cent sequentially.

With this revision in deposit rates, SBI's cost of funds is expected to be lower, a senior official of the bank said, as about 70 per cent of the bank's deposits are in the one year-3 years maturity for which rates have been reduced.

The bank's net interest margins would have taken a 5 basis points hit following the CRR hike. "This reduction in deposit rates will help neutralise the additional cost owing to the CRR hike," the official said.