In March, the State Bank of India (SBI) announced that it will link interest rates for its savings accounts (with balances over Rs 1 lakh) and short-term loans to the RBI’s repo rate. The new rates linked to the external benchmark will come into effect from May 1, i.e., tomorrow. With this, SBI will become the first bank in the country to link deposit accounts and loans of any kind directly to an external benchmark wherein changes in the latter would be auto-transmitted to the former.
Interestingly, as per the current repo rate, SBI’s savings accounts with over Rs 1 lakh deposits will (from May 1, 2019 ) earn less interest than those with smaller balances in their accounts and also 0.75 percent less than the 4 percent being offered on post office savings account. However, if the repo rate goes above 6.25 percent, then the interest rate for the large SBI savings accounts would be higher than the current 3.5 percent being earned on smaller accounts, as per the external benchmarking formula.
So, from tomorrow, interest rates on large savings accounts and on some short-term loans will automatically change as and when RBI changes its repo rate.
Here are five things you should know about SBI’s new interest rate setting mechanism for its savings accounts and short-term loans.
1)Only savings accounts with deposits above Rs 1 lakh will be linked to the external benchmark. On these deposits, from May 1, SBI will be offering interest rate of 2.75 percent or 275 basis points (bps) below repo rate, according to the bank’s website. The repo rate at the moment is 6 percent therefore from tomorrow these savings accounts will earn interest of 3.25 percent per annum. This is not good news for those with deposits above Rs 1 lakh in SBI savings accounts.
2)In March, the bank had said that to insulate small deposit-holders and small borrowers from the movement of external benchmarks, the bank has decided to exempt savings bank account holders with balances up to Rs 1 lakh and borrowers with cash credit accounts and overdraft limits up to Rs 1 lakh from linkage to the repo rate.
3)For other savings account deposits, interest rate will continue to be set by the bank as per current RBI guidelines. This means that savings accounts with balances less than Rs 1 lakh will continue to earn 3.5% interest as per the current rate fixed for these accounts. This interest rate is also subject to change by the bank as per RBI rules but , it will not get reset automatically according to the repo rate movement.
4)At present, interest rate on SBI savings account with deposits up to Rs 1 crore is 3.5 percent. And deposit accounts above Rs 1 crore earn an interest of 4 percent a year.
5)All cash credit accounts and overdrafts with limits above Rs 1 lakh will also be linked to the benchmark policy rate, plus a spread of 2.25 percent. “The risk premiums over and above this floor rate would be based on the risk profile of the borrowers, as is the current practice,” states the SBI website.
What is interesting to note is that RBI has deferred its plan to replace MCLR with an external benchmark as the basis for fixation of interest rates for retail loans by banks. In its bi-monthly monetary policy meeting in December of last year, the central bank announced all the floating rate personal or retail loans (housing, auto etc.) and micro and small enterprises will be linked to any of the four external benchmarks.