SBI links rates for cash credit, working capital loans and savings deposits above Rs 1 lakh to the repo.
In line with the wishes of RBI, which wants more effective transmission of a change in the repo into loan rates, SBI has decided to link loan rates to an external benchmark. From May 1, cash credit and working capital (WC) loans of above Rs 1 lakh will be priced at 225 basis points above the repo rate, or 8%. This is a good 55 basis points lower than the lender’s current MCLR of 8.55%, and one would wonder why the bank is dropping rates so sharply.
However, SBI is protecting its margins by simultaneously pricing all savings deposits of over Rs 1 lakh at the repo minus 275 basis points; at the current repo rate of 6.25%, this works out to the prevailing rate of 3.5%. However, in the event of a repo rate cut, it would stand to gain since the savings deposits base is much larger and also because a good 31% of SBI’s deposits are over `1 lakh. On the other hand, the cash credit accounts for about 25% of the loan book and the loan portfolio is, of course, smaller than the deposit base. More importantly, the bank will be charging the borrower a spread that it deems appropriate, and it is free to revise that spread in case the credit profile of the borrower deteriorates. As the management has said, it is important to protect the net interest income and the net interest margin, irrespective of the movements in the market.
SBI is playing it safe, and rightly so, by not yet linking retail loans to an external benchmark, which is what RBI was looking for though the final guidelines are yet to be announced. Products such as home loans carry much less risk and are very price-sensitive, and the lender would find it extremely difficult to compete if it increased rates too much in the event of a repo rate hike. Although HFCs may not be as active in the market as before, the home loan market remains a highly competitive one since the private sector banks are very active, and SBI would not want to lose market share. To ensure that it is able to win customers, it needs the flexibility to price these loans attractively.
Also, the lender is treading very cautiously by not offering a floating interest rate on term deposits. Given how the growth in deposits has significantly undershot that of loans over the past year or so—10% or thereabouts compared with 14.5-15%—such a step could be somewhat tricky. In the current environment, where interest rates in the system are trending down, and RBI is expected to trim the repo, too sharp a fall in fixed deposit rates might just push savers to other banks. In fact, chairman Rajnish Kumar observed that the bank’s experiment to offer a floating interest rate on fixed deposits did not work. Until this happens, it would be hard to ensure total transmission without an impact on margins. If some of the other banks want to drop loan rates—to compete in the cash credit market—they might have to compromise on their margins since the quantum of their savings deposits as a percentage of total deposits might not be as high as it is for SBI. In a very small way, SBI has started to disrupt the market.