SBI links deposit, loan interest to repo rates..

In a surprising move over the weekend. SBI decided to link its deposit and lending rates with RBI’s repo rate on selected products.

Hiral Thanawala of moneycontrol reports on this move:

The State Bank of India¬†(SBI) is the first bank to announce linking of its interest rates on deposits and loans to an external benchmark from May 1, 2019. The move implies that whenever the Reserve Bank of India (RBI) announces a change in the repo rate, it will automatically reset SBI’s interest rates.

In savings account with deposits balances above Rs 1 lakh, the effective interest rate will be 2.75% below repo rate, which is currently at 6.25%. With this, effective interest rate in savings account works out to be 3.5%, which is unchanged at present.

Further, all cash credit accounts and overdrafts above Rs 1 lakh would be priced at 2.25% over the repo rate. So, at current repo rate of 6.25%, this comes to floor rate of 8.5% for the bank. On this floor rate, the bank will charge a risk premium based on the risk profile of the borrower.

Interest rates remain unchanged for savings account holders and borrowers with cash credit and overdraft up to Rs 1 lakh.

As per Ira Dugal and Andy Mukherjee, savings deposits are 40% of total deposits and those savings deposits above Rs 1 lakh are 80% of savings deposits. Thus, 32% of SBI’s deposits are now linked to Repo rate. A significant step.

Hiral says it will push other banks to join in as well. Interesting times…

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