State Bank of India hits autopilot on interest rates

India's largest lender, the State Bank of India (SBI) has decided to link its interest rates on deposits and loans to the central bank's policy rate from May 1, 2019. This is the first time ever that a bank has tied its rates to an external benchmark, even as regulatory norms allowed them to do so.

The move implies that whenever the Reserve Bank of India (RBI) announces a change in the repo rate, it will automatically reset SBI's interest rates.

"We will do the monetary policy transmission on the liability side through savings rate which will automatically get reset when the policy rates change," SBI's Managing Director PK Gupta told Moneycontrol.

While SBI has linked only select rates to the policy, it will have implications on longer-term loan rates as well which are priced on the basis of the bank's Marginal Cost Lending Rate (MCLR).

"Once the savings bank gets reset, the impact of that comes on MCLR automatically, so to that extent, the transmission will happen on other loans as well," Gupta said, adding that the decisions on MCLR will be taken in the bank's asset-liability committee meetings as usual.

The bank has fixed a spread of 2.75% for savings bank rate and 2.25% on short-term loans rate. It is important to note that this will only be applicable to accounts with balances of more than Rs 1 lakh.

So, with the RBI's repo rate at 6.25% currently, SBI's savings bank account rate on deposits of above Rs 1 lakh stands at 3.5% which is 2.75% below the repo rate. Also, interest rate on short-term loans like cash credit and overdrafts of above Rs 1 lakh is at 8.5% which is 2.25% above the repo rate. For such loans, risk premiums above the floor rate of 8.5% will be based on the risk profile of the borrower.

The RBI had, on February 6, reduced its policy rate by 25 basis points to 6.25%. RBI Governor Shaktikanta Das had also met with top lenders asking them to effectively pass on the benefit to the customers.

Since March 1, other than SBI, a number of other lenders like HDFC Bank, Bank of Baroda, Punjab National Bank, Kotak Mahindra Bank, YES Bank and Union Bank of India have reduced their MCLR in select tenors by 5-15 basis points.