For the first time since nationalisation of Indian banks, State Bank of India (SBI) last week voluntarily decided to simultaneously link both deposit and loan products to an external benchmark from May.
The unanticipated move, which comes just one month ahead of the proposed linking of all retail and MSME loans based on floating rates to an external benchmark, caught the industry by surprise.
Banks are reluctant to link only loan products to an external benchmark without tweaking deposits. In the past, efforts, including that of SBI, linking term deposits alone to variable interest rates met with limited success, which is why, SBI’s decision to tweak rates on one deposit product (savings account) and one loan product (cash credit loans), appears to be a pilot of sorts to prove that it’s impossible to clap with one hand tied behind and convince the regulator on impartial linking of rates to external benchmarks. It remains to be seen if the regulator will consider deferring the April deadline (to link floating loans to an external benchmark) to evaluate the outcome of SBI’s last week decision.
Though SBI is considered the trendsetter by virtue of its size and market share, experts believe other banks will wait, but eventually follow suit for one obvious reason: A variable interest rate on assets and liabilities helps reduce volatility in net interest margins.
Starting May, interest rate on SBI’s all savings accounts above Rs 1 lakh would be priced at 275 bps below the prevailing repo rate (currently at 6.25 per cent). It means, interest will remain unchanged for now at 3.5 per cent, but will move in either direction from May based on repo rate movements. Currently, interest rate is fixed at 3.5 per cent and despite the banking regulator de-regulating interest rates on savings accounts in 2011, banks refused to tinker with rates with only a few like Kotak Mahindra Bank and Bandhan Bank making an exception. So far, banks are hesitant to tweak rates on deposits for fear of losing market share in a declining interest rate scenario. As it is, latest data shows private lenders are aggressively eating into PSBs’ share of retail deposits over the past few years. This despite PSBs offering relatively higher interest rates.
“There could be some impact even on SBI as its government deposits could see volatile movement. Rural and semi-urban markets have seen a rise in savings account share irrespective of interest rates. The market condition is probably forcing banks to maintain a status quo on product offerings,” Kotak noted.
Besides savings accounts, cash credit loans (greater than Rs 1 lakh) too would be 225 bps in excess of the repo rate. It means, interest rate of 8 per cent as against the prevailing MCLR of 8.55 per cent. But going forward, the spread might be higher based on the overall risk assessment by the bank.
According to Kotak Institutional Securities, the current impact of the move would be negligible, but could be beneficial in the long-run.
It, however, added that its medium to long-term impact is contingent on internal and external variables. “Internal variables would be customer behavior during different interest rate regimes and external variables being competitor reaction for such products and importantly, the ability to shift deposits and loans to competing lenders,” Kotak noted.
According to the brokerage, a move towards adopting market benchmarks, even if it means to 25 per cent of borrowers, is still a painful transition for the system since this would be the third change in just ten years (PLR/base rate/MCLR).
