As State Bank too cuts deposit rates, era of cheaper loans get closer

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Mumbai | Published: December 6, 2014 1:15:56 AM

With large public and private sector banks cutting term deposit rates in quick succession, banks are likely to cut loan rates...

State-BankSBI is the third bank after private sector lenders ICICI Bank, the country’s second-largest bank, and HDFC Bank to reduce deposit rates during the week.

With large public and private sector banks cutting term deposit rates in quick succession, banks are likely to cut loan rates early next year.

The country’s largest lender State Bank of India (SBI) on Friday cut its deposit rates for maturities of over one year by 0.25%.

SBI is the third bank after private sector lenders ICICI Bank, the country’s second-largest bank, and HDFC Bank to reduce deposit rates during the week. In fact, this is the fourth time SBI has trimmed deposit rates in the last five months.

SBI chairman Arundhati Bhattacharya had recently said that loan rates would start trending downwards through a compression of spreads but had added that deposit rates also needed to come down.

SBI-rates

“We led the deposit rate cut a while back and a few bigger banks cut their rates about three weeks back and so, some of the bigger banks are now beginning to cut on their deposit rates. As and when that gets entrenched and the deposit rates trend downwards you can also see some kind of result in cuts in the base rates,” Bhattacharya had said.

In a regulatory filing on Friday, SBI said it has lowered deposit rates by 25 basis points (bps) to 8.5% for deposits maturing between one and three years. The bank has also revised its term deposit rates for maturities of three to five years, and five years and above to 8.5% and 8.25%, respectively. These rates would also be applicable, SBI said, for NRE deposits of one year and above.

Private sector lender Axis Bank has also cut rates by up to 75 bps on term deposits below one year and by 15-25 bps in select maturities above one year, effective December 8.

According to Siddharth Rath, head of treasury at Axis Bank, there is a secular downward trend of deposit rates, which could lead to base rate cuts also.

“Base rate cut will hinge on when the RBI announces a cut in repo rate,” he told FE.

A few days ago ICICI Bank and HDFC Bank trimmed their fixed deposit rates below Rs 1 crore by 25 bps and 25-50 bps, respectively, in select maturities. At present, ICICI Bank, HDFC Bank and SBI have their base rates at 10%, the lowest in the industry. Private sector lender Axis Bank is the only bank that lowered its base rate by 10 bps in October.

Deposit rates have come off beginning July this year when SBI cut its term deposit rates by 25-50 bps in certain categories. Flush with funds and finding a mismatch in credit demand, banks have been cutting deposit rates for the last five months.

Analysts said that with lower cost of funds, a result of lower interest paid on deposits, banks are likely to pass on the benefit to customers with a cut in base rates. The base rate is the lowest lending rate of a bank.

Growth of non-food credit, which has consistently fallen from 14.2% (year-on-year growth) in the beginning of FY15 to 9.7% in the September 19 fortnight, slightly recovered to 11.14% for the fortnight ended November 14. Deposits, on the other hand, grew 12.16% y-o-y to Rs 82.53 lakh crore for the fortnight ended November 14.

In October, SBI had lowered interest rates by 100 bps to 5% for deposits maturing between seven and 45 days. In an earlier instance, SBI had revised its term deposit rates in September also when it cut retail term deposit rates by 25 bps for certain tenures. Analysts said that the gradual change in deposit rates will allow the bank to improve its net interest income over time.

Other public sector banks to revise their deposit rates were Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and Bank of Baroda. While PNB revised rates of bulk deposits, OBC trimmed rates in the retail segment.

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