Flush with funds at a time when there are few takers for loans, State Bank of India (SBI) on Monday dropped the interest rate on savings accounts below Rs 1 crore by 50 basis points (bps) to 3.5%, the lowest in six years. The cut comes ahead of the monetary policy announcement on Wednesday when the Reserve Bank of India (RBI) is widely expected to trim the repo rate by 25 basis points to 6%. SBI now offers the lowest interest rate on savings balances. While most banks pay 4%, private lenders Kotak Mahindra Bank and Yes Bank offer 6% as they are looking to build a retail franchise.
The RBI had in October 2011 deregulated the interest rate on savings banks deposits. The SBI management claimed it was unable to maintain its marginal cost of funds-based lending rates (MCLRs) at current levels since 60% of the deposits that had come in with demonetisation had since moved out. Between November 8 and December 31, SBI had received inflows worth Rs 1.5 lakh crore into savings accounts, SBI deputy MD and CFO Anshula Kant said, of which the bank has retained roughly Rs 60,000 crore.
Kant told reporters 90% of the bank’s Rs 9.4-lakh-crore savings accounts base comprised balances of under Rs 1 crore. As such, the lender will now save approximately Rs 4,230 crore in interest payments annually. SBI’s cost of funds has fallen progressively from 6.02% in the September 2016 quarter to 5.94% in the December 2016 quarter to 5.88% in the March quarter. SBI’s savings accounts fell by Rs 5,000 crore between March and July this year whereas they had grown by Rs 26,000 crore during the corresponding period in 2016. The bank’s domestic advances grew 7.9% in 2016-17 to Rs 13.4 lakh crore. Compared to this, in 2015-16, loans and advances had grown 12.8%.
With retail inflation hitting 1.54% in June, the real interest rate on one-year money with SBI now stands at a multi-year high of 3.18%, adjusting for a tax rate of 30%. SBI pays 6.75% on one-year fixed deposits. Outstanding deposits in the banking system at the end of July 7 were Rs 106.5 lakh crore; deposits have been growing at a fast clip of 10-11% over the last several months. In contrast, loan growth has been sluggish at 5-6% in the last four months. Outstanding non-food credit grew 7.26% year-on-year to Rs 76.53 lakh crore, as on July 7.
Banking experts pointed out savers are parking their surpluses in term deposits to earn better returns. Since the announcement of the note-ban exercise in November 2016, the total value of deposits with banks has remained consistently above Rs 104 lakh crore. In January, SBI had taken a deep 90-bps cut in its one-year MCLR to bring it down to 8%. It has not revised MCLRs ever since, even as it reduced the spread over the MCLR for some categories of home loans. As per RBI guidelines, banks must offer the same interest rate on savings accounts where the balance is up to Rs 1 lakh. For balances more than Rs 1 lakh, banks are permitted to offer differentiated rates.