90% of customers will be affected

State Bank of India’s savings bank deposit rate was steady at 4 per cent for six years. On Monday, India’s largest bank cut it to 3.50 per cent on deposits up to ₹1 crore, a move that could prompt other banks to follow suit.

SBI cited a decline in the inflation rate, high real interest rates (after allowing for inflation), abundant liquidity and muted credit growth to rationalise its rate revision. The interest rate on deposits over ₹1 crore stays at 4 per cent. The new rate on deposits below ₹1 crore took effect on Monday.

The Reserve Bank of India deregulated savings rate in October 2011, but SBI, other public sector banks and private banks such as ICICI Bank and HDFC Bank held their rates steady. Kotak Mahindra Bank, YES Bank and IndusInd Bank upped their savings bank rates.

If other banks now follow the SBI in lowering rates, private banks and small finance banks, which offer more than 4 per cent, could gain deposits.

On a savings bank deposit base of ₹9.40 lakh crore (of which 90 per cent is in the below-₹1 crore category), SBI could save about ₹4,000 crore from the 50 basis points cut.

SBI Managing Director Rajnish Kumar said: “The (real interest rate) is high even after this cut, but a sharper cut was not wise at this stage. So, we have taken a graduated approach.”

Between cutting savings rates and raising the marginal cost of funds based lending rate (MCLR) in the backdrop of outflows of current account, savings account (CASA) deposits garnered during the demonetisation period, the bank preferred the former.

Kumar said the bank did not consider it appropriate to raise the lending rate because the costs and equated monthly instalments would have gone up for borrowers in the agriculture segment, small and medium enterprise segment, retail housing, and affordable housing.

Asked if the bank would cut term deposit rates if the RBI cuts the repo rate, Kumar said, “In the last six months, the bank has cut the rate on TDs quiet aggressively. If there is a scope, we will see.”

Market-based pricing

Krishnan Sitaraman, Senior Director, Crisil Ratings, said today’s SBI move marks a shift towards market-based pricing for savings deposit. Other large banks may be encouraged to follow suit, which will bring down the banks’ cost of funds. SBI’s shares closed at ₹312.55 on the BSE, up 4.46 per cent.