SBI cuts fixed deposit rates second time in a month

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Published: August 24, 2019 1:56:05 AM

A day later, SBI had circulated a note recommending that the regulator enforce all incremental bulk deposits to be repo-linked or flexible.

On Monday, SBI chairman Rajnish Kumar had said that while the bank had linked home loans and cash credit facilities to the repo rate, there would be a need to simultaneously have floating rates on deposits.

State Bank of India (SBI) on Friday cut interest rates on bulk and retail term deposits for the second time in a month. The fresh reductions come amid an increased push for better policy transmission from the Reserve Bank of India (RBI) at a time when a large number of banks have moved to link retail lending rates to the repo.

While rates on retail deposits — those under `2 crore — were lowered by 10-50 basis points (bps), those on bulk deposits fell by 30-70 bps. A one-year fixed deposit (FD) with SBI will now earn 6.7% per annum, down from 6.8% earlier. The bank’s closest peers HDFC Bank and Bank of Baroda (BoB) pay 7% and 6.45%, respectively, on one-year retail term deposits. The rate on one-year bulk deposits, which was left untouched in the previous round of cuts, was slashed by 30 bps to 6.4%.

On Monday, SBI chairman Rajnish Kumar had said that while the bank had linked home loans and cash credit facilities to the repo rate, there would be a need to simultaneously have floating rates on deposits. “For any transmission to happen, it has to happen on both sides. And, 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 explained.

If such flexibility is created on the liabilities side, the bank will pass on all rate cuts to its borrowers. Since existing liabilities cannot be repriced, only new borrowers will get the benefit of repo-linked loans.

A day later, SBI had circulated a note recommending that the regulator enforce all incremental bulk deposits to be repo-linked or flexible.

“The share of bulk deposits in banks’ total deposits could be around 30% after the definitional change. Needless to say, most of the bulk deposits are from institutions,” the note said, adding, “It is thus logical that large institutions could afford to take interest rate risk as this would spare the retail depositors from taking the same.”

On Friday, the bank said that it has decided not to reduce the savings bank (SB) interest rate further and hold it at the existing level of 3% for customers with balances above `1 lakh. Customers with SB balances up to `1 lakh will continue to get the rate of interest at 3.5%. “The RBI in its third bi-monthly policy had reduced repo rate by 35 bps with effect from August 7. Had this rate cut been transmitted to SB deposits, the applicable returns on SB deposits with balances above `1 lakh would have dropped to 2.65% (275 bps below repo rate, i.e. 5.40%) with effect from September 1, 2019,” SBI stated in a release.

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