SBI cuts rate on savings account by 50bps to 3.5%

State Bank of India (SBI) has cut savings account interest rate by 50 basis points to 3.5% for deposits below Rs 1 crore (100bps = 1 percentage point).

This is the first time since interest rates were deregulated in October 2011 that the bank has cut interest rates. The bank said the cut was on the back of a surge in savings deposits during demonetisation.

Apart from this, SBI said that its real interest rates — cost of funds adjusted for inflation — was at the highest level and the bank expected softening of interest rates in the system.

The bank will, however, continue to offer 4% for those maintaining above Rs 1 crore in savings accounts. Bankers say these accounts are few and largely of those who maintain a temporary high balance following sale of property or some asset.

"The revision in savings bank rate would enable us to maintain the MCLR at the existing rates, benefiting a large segment of retail borrowers in SME, agriculture & affordable housing segments. We encourage people to move to fixed deposits as we expect less volatility and better facilitation due to our strong reach, distribution and franchise network," said Rajnish Kumar, MD, SBI.

Incidentally, the rate cut comes close on the heels of the bank increasing the minimum balance requirement on metro savings accounts to Rs 5,000.

The move comes two days ahead of the Reserve Bank of India's announcement of its monetary policy review on August 2. It is widely expected that the monetary policy committee will recommend a 25bps cut in key interest rates.

Unlike fixed deposits where rate cuts come into effect during renewal, a savings rate cut has immediate impact and therefore increases the likelihood of the bank bringing down its lending rate once again.

Rival banks avoid undercutting SBI, which is the largest bank in the country with 24,000 branches. With SBI cutting rates, other banks might follow suit soon.

Despite deregulation in 2011, most banks have continued to maintain the return on savings account at 4%. A few aggressive private players like Yes Bank and Kotak Bank offer a higher return. There are multinational banks too which offer better terms on savings deposits.

However, these lenders have a very limited reach. According to a report by SBI's chief economist Soumya Kanti Ghosh, there are five reasons for a rate cut by RBI on Wednesday.

These are — satisfactory monsoon, hassle-free implementation of GST, CPI and WPI expected to remain below 2%, stable core inflation and limited impact of pay commission allowances on inflation.

Interest rates on savings deposits have been stable despite inflation swinging from 9% to 2%. From 2003 to 2011, the interest on savings bank accounts were fixed at 3.5%. Since then, they have remained largely steady at 4%.

Source:-The Times of India