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SBI links savings account, short-term loan interest rates to RBI repo rate

State Bank of India (SBI) on Friday linked its interest rate on savings account with balance above ₹1 lakh and short-term loans to Reserve Bank of India's (RBI) repo rate, effective 1 May 2019. This means that savings account interest rates and interest rate on a few loans will change as and
when the regulator changes its repo rate.

The RBI repo rate currently stands at 6.25%.

According to an SBI statement, the bank will link savings accounts with deposits over ₹1 lakh to repo rate at current effective rate of 3.5% (2.75 percentage points lower than the current repo rate of 6.25%). All cash credit accounts and overdrafts with limits above ₹1 lakh will also be linked to the benchmark policy rate, plus a spread of 2.25%—amounting to 8.5%.

SBI will charge a risk premium on these loans, over and above the floor rate of 8.5%, based on the risk profile of the borrower, similar to the current practice.

According to SBI's managing director P.K. Gupta, 40-45% of the bank's deposit will be affected by this move. While home loan interest rates will still be determined by the marginal cost of funds-based lending rate, or MCLR, rates are expected to fall as savings deposit rates have a substantial weightage while determining MCLR.

“Home loan customers will soon see better rates as we are moving a chunk of our liabilities to the external benchmark rate, affecting a pass-through of policy rate cuts," said Gupta over the phone.

Bankers have always maintained that linking their asset portfolio to an external benchmark would require them to link their liabilities to an external benchmark as well to avoid asset liability mismatch.

In order to make the loan pricing process transparent, RBI has over the years directed banks to price their loans against their benchmark prime lending rate, base rate, and, finally, MCLR. But in December 2018, RBI asked banks to price their loans against an external benchmark.

RBI 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.

FBIL, jointly owned by Fixed Income Money Market & Derivative Association of India, Foreign Exchange Dealers Association of India and the Indian Banks’ Association (IBA), was formed in 2014 as a private limited company. Its aim is to develop and administer benchmarks relating to money market, government securities and foreign exchange in India.


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