The State Bank of India (SBI), India’s largest commercial bank that holds nearly three quarters of country’s savings bank deposits, has slashed the interest earned on savings bank balances exceeding Rs 1 lakh. It follows the lender’s decision to link its saving and loan interest rates to the Reserve Bank of India’s (RBI’s) repo rate. This means people having a saving bank account in SBI with balance exceeding Rs 1 lakh will now earn a quarter percentage point less interest. After two back-to-back rate cuts by the RBI, the repo rate currently stands at 6 per cent, while the reverse repo rate stands at 5.75 per cent. The interest rate on saving bank accounts will be 2.75 per cent less than the repo rate. This means the interest rate will be 3.25 per cent less. (6 per cent minus 2.75 per cent equals to 3.25 per cent). SBI is the first bank in the country to link its interest on loans and deposits to repo rate. Worldwide, interest rates on bank deposits are coming down. In developed countries, interest rates on deposits are as low as 1 to 2 per cent per annum.
In fact, in some countries, little interest is earned on bank deposits. If the prognosis by some economists is to be believed, people will have to pay a charge on the deposits that they would park with banks. In the years ahead, as the pace of growth of our economy accelerates, interest rates in India will likely come down. SBI has about 440 million savings bank accounts. Of this, the number of people having balances above Rs 1 lakh in their saving bank accounts is an estimated 22 million — about 5 per cent. However, the bank has decided to maintain its deposit rates at 3.5 per cent for saving bank accounts with savings below Rs 1 lakh. The linkage of interest rates on loans and deposits with RBI’s repo rate will mean interest rate on such balances will change according to repo rate, which is reset from time to time by the RBI. If the RBI hikes repo rate, interest on savings bank deposits will go up. It may also fall further if the repo rate continues its downward journey. We are aware that the RBI is under constant pressure from the government to slash repo rate. The current RBI governor, Shaktikanta Das, has cut repo rate by 50 basis points since he took over in December 2018. Going ahead, the bank is likely to further cut repo rate as inflation continues to trend downward.
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Other major banks in the country are likely to follow in SBI’s footsteps. Banks stand to gain if repo rate is cut, as they would reduce interest rate on deposits. Similarly, as the repo rate is raised, which may not happen in the near future, banks will raise interest on lending. In case repo rate is raised, the interest earned on deposits will also go up. The latest measure by the SBI has brought in a lot of transparency in the system. The new system will help in more efficient integration of RBI’s policy rates in the banking system. Transmission of changes in RBI rates to bank interest rates will be automatic and seamless. Currently, banks are at liberty whether they would pass on rate changes to consumers or hold on to rates. Many a time, we have seen how the RBI shows its helplessness with regard to intransigence of banks. The process will be more dynamic now. As of now, different banks have been following different yardsticks to determine their rates of interest. There are too many internal benchmarks such as Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base Rate and Marginal Cost of Funds-based Lending Rate (MCLR) to determine interest rates. The practice hitherto left the consumers confused. The latest move by the SBI will hit 22 million small-time depositors having balances up to Rs 1 lakh in their SB a/cs as they would earn Rs 2.50 less per annum on every Rs 1,000 left in their accounts. However, this is a small price to pay considering the degree of transparency that the new policy measure will inject. The repo-determined interest rates will be easy to understand and consumer-friendly. We hope other banks will follow the SBI.
