The country's biggest public sector, it a first-of-its-kind move announced that it will link its savings deposit and short term loan interest rates to RBI's repo rate. The State Bank of India (SBI) said late on Friday that its new rates that will be linked to the external benchmark of repo rate will be effective from 1 May.
This is a significant move considering that the reflection of a change in repo rate by the RBI after its monetary policy review has been slow to catch up among Indian banks. Such a move coming from a bank that has a hold of nearly a quarter of the banking system India will help effectively ensure a faster transmission of the changes to borrowers.
"To address the concern of rigidities in the balance sheet structure and address the issue of quick transmission of changes in the RBI policy rates, effective May 1, 2019, we've taken the lead in linking key pricing decision for savings bank deposits and short-term loans to the repo rate of the RBI," it said in the statement.
On 7 February, after the Monetary Policy Review, the Central Bank had cut the repo rate by 25 basis points to 6.25 percent. SBI managing director PK Gupta told PTI that the 25 basis points deduction in repo rate could mean a 7 to 8 basis points cut in the MCLR for the lender. MCLR is the minimum interest rate set by the banks below which the cannot lend. A lower MCLR will be good for those looking to borrow money.
As for savings bank deposits, only those with a balance above Rs 1 lakh will be linked to the repo rate with the current effective rate being 3.50 percent per annum, that is 2.75 percent below the present repo rate. All cash credit accounts and overdrafts with limits above Rs 1 lakh were also linked to the repo rate plus a spread of 2.25 percent.
Savings bank account holders with balances up to Rs 1 lakh and borrowers with cash credit accounts and overdraft limits up to Rs 1 lakh will be exempted from linkage to the repo rate the bank said, in order to insulate the small deposit-holders and small borrowers from the movement of external benchmarks.
The risk premia over and above this floor rate of 8.50 percent will be based on the risk profile of the borrower, as is the current practice, the bank said.