Bankers have long argued that it is not viable to price loans using external benchmarks unless deposits are also linked to such benchmarks. State Bank of India (SBI) was the first to link savings accounts with balances of over Rs 1 lakh to the repo rate in May.
Following the Reserve Bank of India’s (RBI) directive to banks to link all floating-rate retail loans to external benchmarks, Allahabad Bank will link savings bank deposits with balances of over Rs 40 lakh to the repo rate, effective October 1. Bankers have long argued that it is not viable to price loans using external benchmarks unless deposits are also linked to such benchmarks. State Bank of India (SBI) was the first to link savings accounts with balances of over Rs 1 lakh to the repo rate in May.
Allahabad Bank is the second lender after SBI to link its liabilities to an external benchmark. “Savings Bank Deposit account holders of Allahabad Bank are hereby notified that w.e.f 1st October, 2019, the rate of interest on Savings Bank Deposit accounts with balances above Rs 40 lacs are linked with the RBI repo rate and as such the effective rate of interest aligned with current repo rate shall be 3.65%,” the Kolkata-based lender said in a public notice.
Unwilling to give up their margins, banks are toying with the idea of also offering floating-rate bulk deposits of over Rs 2 crore, which typically come from corporates.
SBI chairman Rajnish Kumar last month said that for any transmission of monetary policy, rate actions must be applied to both assets and liabilities. “As we create flexibility on the liability side to link our liabilities to repo, which is an external benchmark and of all the benchmarks we studied, we decided that this is the most workable benchmark,” he had said.
Banks are also likely to explore options such as hedging their interest rate risk through derivatives, say analysts. “Lenders may manage pressure by cutting rate on savings/term deposits or linking it to repo rate, using leeway of three-month resets/converting SME (small and medium enterprise) loans to short-term fixed rate loans and/or using interest rate derivatives to hedge these risks,” CLSA said in a recent report. Allahabad Bank is set to be amalgamated with Chennai-based Indian Bank as per the government’s move to merge 10 public-sector banks into four.