SBI links large savings a/cs and overdrafts to repo rate

MUMBAI: State Bank of India (SBI) has become the first lender to link interest rates on its savings accounts — with deposits of over Rs 1 lakh — to the RBI repo rate. Also, borrowers with an overdraft account of over Rs 1 lakh will pay interest linked to the repo rate. The move will result in any rate change by the RBI being instantly passed on to depositors and borrowers.

With effect from May 1, savings bank deposits, with balances of above Rs 1 lakh, will earn a return equivalent to 2.75% below the prevailing repo rate. Since the current repo rate is 6.25%, the interest on these accounts will continue to be 3.5%. However, should the RBI again cut rates in its next policy in April 2019, the return will come down.



In addition to deposits, all cash credit accounts and overdrafts with limits of above Rs 1 lakh will be at the repo rate plus a spread of 2.25% — or 8.5 %. In addition to this, the bank will add a spread based on the risk profile of the borrower.

“In order to insulate the small deposit holders and small borrowers from the movement of external benchmarks, SBI has decided to exempt savings bank account holders with balances of up to Rs 1 lakh and borrowers with cash credit or overdraft limits up to Rs 1 lakh from linkage to the repo rate,” the bank said.

The move is significant as, barring a few outliers, the interest on savings bank accounts has been rock steady at 3.5-4% over the years (see graphic). Although the RBI had stopped dictating the interest rate on savings accounts in October 2011, none of the leading banks entered into a rate war. It were banks that had a small distribution network — like Kotak Bank, DBS Bank and Yes Bank — that offered higher returns.

Pricing the deposits in relation to the repo rate will also enable SBI to link some of its loans to an external benchmark. In the October policy announced by Urjit Patel, the then RBI governor, the central bank had said that lenders would have to shift to an external benchmark for their retail loans with effect from April 1, 2019. The RBI wanted banks to use an external benchmark instead of setting the rates themselves, as it felt that lenders were slow to pass on rate cuts.

In a meeting with Shaktikanta Das, who succeeded Patel, bankers expressed challenges faced in pricing their loans to an external benchmark. SBI chairman Rajnish Kumar had earlier said that it was difficult to peg loans to an external benchmark without having more flexibility in repricing deposits.

“In order to address the concern of rigidities in the balance sheet structure and address the issue of quick transmission of changes in RBI’s policy rates, SBI has taken the lead in linking its key pricing decision for savings bank deposits and short-term loans to the repo rate of the RBI,” said the bank in a statement issued here on Friday.