New Delhi
A steep cut in deposit rates by State Bank of India (SBI) on Monday has raised hopes of a corresponding lending rate cut by India’s largest bank in August.
SBI said it will reduce interest rates on retail fixed deposits with long tenures by up to 20 basis points (bps) and 35 bps for bulk deposits with effect from 1 August. For shorter tenure deposits of up to 179 days, the state-run bank will slash deposit rates by 50-75 bps.
The liquidity position has become comfortable compared with the situation in May, and interest rates are also coming down, said Prashant Kumar, chief financial officer of SBI. In a phone interview, Kumar said that this move will definitely lead to lower lending rates for borrowers and the extent of the cut will be decided after the bank’s asset-liability committee meets in August.
Earlier this month, Reserve Bank of India governor Shaktikanta Das called for quicker transmission of interest rate cuts after the central bank lowered the key repo rate by 75 bps in 2019. Das is trying to boost investment and consumption after quarterly economic growth slowed to a five-year low in the quarter ended 31 March.
With India’s largest bank slashing deposit rates, other lenders are likely to follow suit.
SBI’s latest move reverses a 20 bps increase in the fixed deposit (FD) rate in May for deposits of less than ₹2 crore in the one- to two-year bracket. SBI’s rate now stands at 6.8%. While smaller state-run rival Bank of Baroda (BoB) pays 6.45-6.6% to depositors in the same maturity basket, private sector lender ICICI Bank pays between 6.9-7%. These rates for ICICI Bank and BoB are for fixed deposits with premature withdrawal facility, and they pay a higher rate for FDs without premature withdrawal.
Since a large bank like SBI relies heavily on deposits to fund loan disbursal, this move is expected to lower the bank’s cost of funds and translate into lower lending rates. As on 10 July, SBI’s one-year marginal cost of funds-based lending rate (MCLR) was at 8.4% after three 5 bps rate cuts since January.
The bank has been able to consistently reduce its cost of deposits over the past couple of years, taking advantage of the falling interest rate scenario. Its cost of deposits declined from 5.84% in FY17 to 5.3% in the following fiscal year and to 5.1% in FY19. The bank held total deposits of ₹29.11 trillion as on 31 March, an increase of 7.6% from the end of the previous fiscal. Of this, term deposits constituted 52% at ₹15.26 trillion. “In view of the falling interest rate scenario and surplus liquidity, SBI realigns its interest rate on retail term deposits (less than ₹2 crore) and bulk term deposits ( ₹2 crore and above) from 1 August. For time deposits with longer tenors, there is a reduction of up to 20 bps in the retail segment and 35 bps in the bulk segment. Interest rates have been slashed by 50-75 bps for time deposits with shorter tenors of up to 179 days,” the bank said in a statement.
This move comes a week before the RBI monetary policy committee meeting. While the median one-year MCLR rate for public sector banks ranged between 8.35% and 8.75% from January 2018 to June 2019, the rates for private banks were at 8.95-9.45%, according to RBI data.
Anil Gupta, vice president of financial sector ratings at Icra Ltd, said that wholesale deposit rates have come down in the last one month because of the surplus liquidity conditions.
“A reduction in deposit cost will benefit the ability of banks to reduce their MCLRs, but it is difficult to say at this point if this will lead to an increase in investment activity. The investment appetite still continues to remain weak for corporates along with weak demand from retail customers as well,” said Gupta.
