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In what could be a landmark event in the history of Indian banking since the RBI’s deregulation on savings rate in 2011, State Bank of India (SBI) has slashed the rates on savings bank accounts by as much as 50 basis points to 3.5% per annum on a balance of upto ₹1 crore. The 4% rate, however, will continue to be offered on a balance of more than ₹1 crore. The country’s largest lender said in a regulatory filing, “the bank is introducing two-tier saving bank interest rate with effect from July 31. While balance above Rs 1 crore will continue to earn interest at 4 per cent per annum, interest at 3.5 per cent will be offered on balance of Rs 1 crore and below,”. “The decline in the rate of inflation and high real interest rates are primary considerations warranting a revision in rates of interest on savings bank deposits”, added the public sector behemoth in its filing.
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What Does the Move Hold for Customers?
The rate cut is expected to impact a large segment of the customers that have the savings bank account with SBI. If reports are to be believed, around 80%-90% of its customers would have a shortfall in savings interest earning. Let’s go through the table below and find out what the latest development means to SBI’s savings bank account customers.
|Savings Rate||Initial Balance (In ₹)||Monthly Contribution (In ₹)||Number of Deposit Years||Amount Deposited (In ₹)||Interest Accumulated (In ₹)||Total Amount (In ₹)|
|4%||10000||10000||15||18,10,000||6,70,000 (Approx.)||24,80,000 (Approx.)|
|3.5%||10000||10000||15||18,10,000||5,70,000 (Approx.)||23,80,000 (Approx.)|
Is Margin Pressure Anything to do with Savings Rate Cut?
A prime reason for the constant fall in the lending rates is attributable to the massive cash flow into the banking system in November-December last year when the song of demonetization was played by the government. With an extensive branch network of around 15,000 in number by then, SBI had garnered a massive pile of the cash deposit, giving it the headroom to slash the rates.
When many were celebrating the arrival of 2017, SBI doubled the celebration for those seeking loans by slashing the benchmark Marginal Cost of Lending Rate (MCLR) by 90 basis points to 8%. With the said move, the bank had slashed the benchmark rate by 200 basis points since January 2015, the time when the Reserve Bank of India (RBI) initiated a phase of rate cuts and cheaper loans for the borrowers to avail.
While the borrowers are rejoicing with the constant fall in rates of the home loan and car loan, the depositors are left reeling under the effect of falling income as the bank has been slashing the deposit rates on a continuous basis. If you carefully observe SBI’s existing lending and deposit scenario, you would find that the public lender disburses the loan at 8.35%-8.80% in response to the fixed deposit rates of 5.50%-6.75% per annum for different deposit tenures, keeping a margin of 1.60%-3.30%. In contrast, the savings rate used to be at 4%, irrespective of the balance in the account, before 31st July 2017. If we bring savings rate into the calculation, the overall margin would thus be 1.60%-4.80%. The pressure of maintaining a margin can be evidenced from SBI’s statement in a filing that says, the savings bank rate revision will help it to maintain the MCLR at existing rates.
Clamour for 25 BPS Repo Rate Cut Getting Louder
It is widely anticipated that the RBI may slash the repo rate by a good 25 basis points (bps) on the back of CPI-based inflation that hit a record low of 1.54% in June, well below 2%-6%, the target set by the Monetary Policy Committee (MPC). And if the RBI does come up with a rate cut, it may prompt the lenders like SBI to decrease the headline rates, putting pressure on the margin component. In lieu of the present situation and a foresight of what to expect in the coming days, SBI may have been prompted to cut the savings rate.
Will Other Lenders Join the Bandwagon?
Top lenders like ICICI Bank, HDFC Bank, Bank of Baroda (BoB), Punjab National Bank (PNB) and Axis Bank with a massive chunk of deposits can be tempted to lower down the savings deposit rates. On the other hand, comparatively smaller units like Kotak Mahindra Bank, IndusInd Bank and Yes Bank may continue to offer rates to the tune of 5%-6%.