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SBI's New Interest Rate Strategy and How it Impacts explained

State Bank of India has announced to link savings deposits rates and short term loans with RBI's repo rate. SBI has become the first bank to do so as commercial banks of India have never linked repo rate directly with the interest rates of savings account or loans.
According to SBI, the new linking process will be applicable from May 1, 2019. The move will likely impact SBI's short term loan borrowers and savings depositors. It is expected to change the way borrowers pay their EMIs on different loans. 

Savings account with over Rs 1 lakh deposits will only be linked with repo rate, excluding deposits below that. Also, borrowers with cash credit accounts and overdraft limits up to Rs 1 lakh will not be included in this linkage process.

Let's understand how the latest SBI decision will impact you in case you are a savings account holder or a short-term loan borrower of the bank:

Why SBI took this decision?

Loans are linked to the bank’s cost of funds and the interest rate is decided on the basis of the bank's Marginal Cost of Funds based Lending Rate (MCLR) declared every month. Though MCLR system will continue, linking of savings deposits rates with the repo rate will make the cost of funds subject to changing repo rates, ensuring a better transmission. It will help the bank get the flexibility and ease to manage its Asset-Liability Management (ALM) better.

Till now, whenever the RBI cut the repo rate, the banks take time to pass on the immediate benefit to borrowers and a time lag in lowering the lending rates occurs every time. 

The SBI move will propel the faster transmission of rate cuts benefit to customers and ensure passing onto the benefits immediately to borrowers. In case of a falling interest rate scenario, it will help borrowers as their EMIs will come down. However, the reverse will happen in case the repo rate rises.

How will it impact you?

In case, you are an SBI savings account holder: 

At present, SBI offers an interest rate of 3.5 per cent p.a on deposits up to Rs 1 crore and 4 per cent p.a on deposits above Rs 1 crore. Now, as per the new norm of linking deposits with repo rate, the deposits above Rs 1 lakh will be subject to change as per the change in RBIs repo rate every month. The means, savings interest rates for such accounts will go up when the repo rate rises and vice-versa. 

However, savings deposits below Rs 1 lakh will not be impacted and continue to get the existing fixed rate.

In case you are a short-term SBI loan borrower: 

As per the bank's statement, small borrowers with cash credit accounts and overdraft limits up to Rs 1 lakh will not be included in the linking process. Hence, they will continue to pay interest in the same way as earlier. However, short-term borrowers with cash credit accounts and overdraft limit over Rs 1 lakh, their EMIs will depend on the rise or fall of repo rate. 

Conclusion: If RBI cuts the repo rate, the SBI will lower the interest rate of savings accounts having deposits above Rs 1 lakh, bringing down its own cost of funds. Due to the reduction in the cost of funds, the MCLR or the lending rate will also come down, making the loans cheaper. 

In such a situation, the transmission will be much faster than before. Earlier, the SBI was bound to give a higher fixed rate on the saving account deposit irrespective of the fall in repo rate.

However, it will be interesting to see, how this new move will impact basic loans like home loans, personal loans etc. What will be the response of public, in the view of the fact that the repo rate can go up and down both. 


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