The decision by State Bank of India (SBI) to switch to floating rates for its savings accounts appears to be a smart move designed to pre-empt RBI’s April deadline for Indian banks to move to external benchmarks for setting lending rates. Henceforth, SBI’s interest rates on savings accounts with balances above ₹1 lakh will be pegged 2.75 per cent below RBI’s repo rate and its cash credits and overdrafts will be priced at a minimum 2.25 per cent over it. While SBI’s move is clearly an attempt to ward off criticism that Indian banks are tardy with their transmission, it is a moot point if it will result in a material reduction in lending rates across the economy.
As the MPC pruned repo rates by 200 basis points between 2015 and 2017, sticky lending rates emerged as a key bone of contention between the regulator and domestic banks. Banks have always argued that the high cost of their legacy deposits stood in the way of quicker transmission. SBI is attempting to address this rigidity by floating its savings account rates. But it is unrealistic to expect SBI’s move to trigger an across-the-board decline in lending rates for three reasons. One, the savings accounts on which rates have been floated make up just a third of SBI’s deposit base. The pass-through of MPC’s future rate cuts to SBI borrowers will therefore remain partial, with every 25-basis point repo rate cut estimated to result in a 7-8 basis point fall in loan rates. Two, SBI has retained flexibility to price its individual loans at a spread over its official lending rate, based on the borrowers’ risk profile. Like the earlier MCLR regime, this still allows the bank to arbitrarily tweak its spreads to protect its margins. Finally, while SBI with its dominant position and comfortable credit-deposit ratio, can probably afford to offer low rates on its savings accounts without a dent to its CASA, the same cannot be said of its competitors, who have lost deposit share to private banks at a furious pace in the last five years. SBI’s move may thus force its peers to either pay higher floating rates on their savings accounts or refrain from floating them, both of which will impede transmission.
Overall, this only goes to show that, however hard the RBI may try, it cannot really force banks to take pricing decisions that are detrimental to their commercial interests. Having tried out many formulaic approaches — Base Rates, MCLR and external benchmarking — it is time the RBI paid attention to the only factor that can ensure seamless transmission — more market competition. In recent years, the RBI’s conservative stance on issuing new bank licences, and its complicated ownership rules have contributed to discouraging many new players from entering the banking space. Remedying this is the best way to ensure that Indian banks don’t sacrifice their customers’ interests at the altar of profitability.