July 31st, 2017
In a move that will affect most of its customers, the State Bank of India (SBI), India’s largest public sector lender, has cut interest rate on savings bank accounts from 4% to 3.5% on balance of Rs 1 crore and below.
This means that those accounts with a balance of Rs 1 crore or less will earn 3.5% per annum from July 31 while those accounts with a balance of above Rs 1 crore will continue to earn 4% per annum.
Around 90% of SBI’s savings bank accounts have balances under Rs 1 crore.
The cut in interest rates is mainly because of two reasons:
- The level of inflation in the economy has fallen, allowing depositors to earn higher real interest rates on deposits.
- Demonetisation has led to a flood of deposits into the banking system. Nearly 60 percent of the deposits that came into the system have proved to be sticky, as RBI Deputy Governor SS Mundra told BloombergQuint in an interview earlier this month.
In a statement, the bank said, “The decline in the rate of inflation and high real interest rates are the primary considerations warranting a revision in the rate of interest on savings bank deposits.”
Banks currently follow a marginal cost lending rate (MCLR) formula where the rate is determined by the incremental cost of deposits rather than the average cost of deposits. The revision in the savings bank rate would enable the bank to maintain the MCLR at existing rates.
Analysts and markets opine the 0.5% cut in savings bank deposits will aid in boosting the SBI’s margins.
Many banks like State Bank of India, Bank of Baroda, ICICI Bank, HDFC Bank and others have reduced their lending rates after they were flushed with funds following the government’s move to demonetise high currency notes on November 8 last year.
The Reserve Bank of India (RBI) is also expected to cut interest rates when it convenes on Wednesday, August 2 for its monetary policy meet.