Despite SLR cut, SBI sees little room for deposit rate cuts

The RBI kept rates unchanged in its first quarter monetary policy review yesterday but slashed SLR by 1% to 23%. Speaking to the press, shortly after the policy announcement, SBI chairman Pratip Chaudhuri said the benefit of SLR cut can be passed on to the retail sector as large long term loan proposals are very few across banks and working capital demand from corporate houses is low.

However, speaking to CNBC TV18, Chaudhuri made it clear that despite the SLR cut, there is very little scope of reducing deposit rates.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Is there any room for deposit rate easing as you can see in the next few weeks and months given that there is a fairly large calendar of tax free products from government backed institutions which are coming up over the course of the year and given other competing products, do you see any elbow room at all?

A: It is not coming from that, our Asset - Liability Committee, ALCO is meeting today afternoon. Although ALCO will take the final call, according to me, there is less room for a cut in deposit rates because the small savings rate is 8.6%. If you top up this 8.6% with subvention, a person gets 8.75%. Therefore, the room for deposit rate cut is slightly less but, perhaps there could be some cut at the long ends.

In fact at the long ends, five years and above, we had reduced our rates from 9% to 8.75%, and then we found that the other banks are stubbornly at 9-9.25%. So we had to move back our deposit rates.

Q: Even then would it work because these tax-free bonds which are coming in from government institutions and this year I believe the calendar is Rs 60,000 crore, they are nearly 8% post tax, why would anybody want to look at public sector deposit at much less attractive rates even for a longer tenure and these are 10-15 year products?

A: It is true but, these were 8% last time. This time we will make a request to the government to not keep the coupon so high. Since they enjoy the tax advantage, our recommended coupon to them should be 6%.

Secondly, bank deposits have other attractions. They are liquid and you can take a loan against the bank deposit. If it is in a neighbourhood bank, you can break them anytime you want. You can use them as collateral for so many things. So bank deposits will continue to have an attraction and Rs 60,000 crore should not really bother us because the total bank deposit growth in a particular year is something like Rs 7-8 lakh crore.

But what is draining away deposits from the banks is not only tax rebounds which are yet to hit the market at the fixed maturity plans of the mutual funds. But you are very right in highlighting this point from a tax perspective. The bank deposits are at the greatest disadvantage or handicap.

There is a case for making it a level playing field in terms of interest income, whether it is by way of deposits, whether it is by way of fixed maturity plans or tax-free bonds. It will be a level playing field and that is how it is the world over because we believe the people who are investing in fixed income products are not really the risk takers.

I do not complaint against tax breaks given to equity investors. But, those who are investing in debt should all be at par and let all the debt issuers compete on price or on service or on convenience, not on unfair tax advantage.