From May 1, State Bank of India’s savings bank deposit holders and borrowers of short term loans, including personal loans, will get instant benefit of any interest rate changes effected by the Reserve Bank of India (RBI). SBI, the largest commercial bank in the country, has decided to link interest rates on savings bank deposits and short term loans to the repo rate of the RBI. The new interest rate system, which is expected to speed up interest rate transmission and transparency in the banking system, will come into effect from May 1, 2019.
What this change means is that RBI interest rate changes will be quickly passed on to these customers. The RBI has experimented with several systems like base rate, MCLR (Marginal Cost of Funds based Lending Rate) and BPLR (Benchmark Prime Lending Rate) to price loans. However, transparency and speedy transmission of policy rate movements has been a problem. Most banks are slow to pass on the interest rate changes, especially if the interest rate is lowered. But, they showed promptness when it came to pass on higher interest rates.
With SBI implementing the RBI directive to link interest rates to an external benchmark repo rate, it can be expected that others set to follow the leader.
“In order to address the concern of rigidities in the Balance Sheet structure and address the issue of quick transmission of changes in RBI’s policy rates; effective from 1st May 2019, SBI has taken the lead in linking its key pricing decision for Savings Bank Deposits and Short Term Loans to the Repo Rate of RBI,” SBI said in a statement.
Kicking off the new rate system, SBI has firstly decided to link savings bank deposits, with balances above Rs 1 lakh to repo rate with current effective rate being 3.50% per annum (2.75% below current repo rate of 6.25%). All cash credit accounts and overdrafts with limits above Rs 1 lakh will be linked to the repo rate (existing repo rate 6.25% plus a spread of 2.25%). The risk premiums over and above this floor rate of 8.50% would be based on the risk profile of the borrower, as is the current practice, SBI said.
“In order to insulate the small deposit holders and small borrowers from the movement of external benchmarks, SBI has decided to exempt savings bank account holders with balances up to Rs 1 lakh and borrowers with CC/OD limits up to Rs 1 lakh from linkage to the repo rate,” the SBI said.
In order to make the loan pricing process transparent, in December 2018 the RBI asked banks to price their loans against an external benchmark.
RBI had said banks are free to decide on the external benchmark: it could be the repo rate, 91-day treasury bill yield, 182-day treasury bill yield or any other benchmark market interest rate produced by Financial Benchmarks India Pvt. Ltd (FBIL), including the Mumbai interbank offered rate, or MIBOR.