State Bank of India (SBI) will move to a new interest rate regime on large savings account deposits as well as short-term loans from today, i.e 1 May 2019. India’s largest bank will link its interest rate on savings account (with balance above Rs1 lakh) and short-term loans (like overdraft and cash credit facility) to the Reserve Bank of India’s (RBI’s) repo rate.
Put simply, interest rates on large SBI savings account deposits and interest rate on some short-term loans will automatically change as and when RBI changes its benchmark policy rate.
Under the new interest rate regime, on savings accounts with deposits above Rs1 lakh, SBI will offer an interest rate that is 275 basis points lower than the repo rate. Since the current repo rate is 6%, interest rates on deposits above Rs1 lakh will come to 3.25% compared with 3.5% offered earlier.
Account holders with a balance of up to Rs 1 lakh will continue to earn 3.5% interest, as per the current fixed rates. This interest rate may also change, but only if the bank decides. It will not automatically track the movement of repo rate.
Similarly, all cash credit accounts and overdrafts with limits above Rs1 lakh will also be linked to the benchmark policy rate, plus a spread of 225 basis points—amounting to 8.25% in the present situation. In addition, SBI said it will also charge a risk premium “over and above” the floor rate of 8.25% based on the risk profile of the borrower, similar to the current practice.
According to SBI, the new system will help in more efficient transmission of RBI’s policy rates in the banking system. SBI will become the first bank in India to adopt an external benchmark rate to the fixed rates and move away from the common practice of finalising loan interest rates based on marginal cost of funds-based lending rate (MCLR).
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