Pioneer! SBI takes lead, sets path for external benchmarking - Other banks too may follow this trend soon

SBI: The largest lender State Bank of India took another bold decision by not only linking its short term loan interest rate but also its savings deposit account with policy repo rate which currently stands at 6.25%. The reason behind such development is to insulate the small deposit holders and small borrowers from the movement of external benchmarks and is why SBI decided to exempt saving bank account holders and borrowers having cash credit or overdraft loans up to Rs 1 lakh from the linkage of repo rate.

Well with this, SBI does become the first bank to follow the pattern inked by RBI governor Shaktikanta Das in his December 2018 policy, when he finally cut down repo rate by 25 basis points and asked every bank to no more decide their lending rate as per the benchmark MCLR but instead link it with four types of external benchmarks. 

Because of SBI’s move,  Dr. Soumya Kanti Ghosh Group, Chief Economic Adviser at SBI Ecowrap said, “SBI has taken the lead in linking its key pricing decision for Savings Bank (SB) Deposits and Short Term Loans to the Repo Rate of RBI in order to address the concern of rigidities in the Balance Sheet structure and address the issue of quick transmission of changes in RBI’s policy rates.”

SBI is seen to benefit from linking saving deposits and short term loan with policy repo rate. Nomura in its research note said, “In the short term, as mentioned above, the only change will be that SA rate for accounts with balances of > Rs 10 million will see a reduction of the rate from 4% to 3.5% – this should aid margins by 6-7bps.”

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Further, Nomura added, “SBI’s SA book >INR0.1mn was +INR8trn as of Mar-18 and it had an INR7trn CC/OD book and both of these portfolios are getting benchmarked to repo rate together. This improves monetary transmission and does that by reducing long-term NIM volatility, in our view.”

Thereby, Nomura on the bank’s share price says, “We reiterate our Buy rating on SBI. Our TP of INR375/share implies 1.05x stress adjusted Mar-21F book + INR81/share value of subsidiaries.”

Will other banks follow? 

Nomura says, “The RBI has been proposing to banks to link lending rates to repo rate. Given that banks hardly borrow any material amounts linked to repo rate, linking of lending rates to repo rate without linking deposit rates to repo rate would have led to huge volatility in margins.”

According to Ghosh, tt is expected that other banks might also follow the suit and will link their deposits with external benchmarks. With this, both assets and liabilities in the banks’ balance sheet will move in the same direction when there is a change in repo rate by RBI.” 

Ghosh added, “The rationale for setting the limit as Rs 1 lakh is primarily to protect the small time depositors from the vagaries of market fluctuations. It may also be noted that RBI allows a differential interest rate structure for saving bank deposits only beyond Rs 1 lakh and the deposit insurance cover is also applicable up to Rs 1 lakh.”

SBI has linked savings bank deposits with balances above Rs 1 lakh to repo rate with the current effective rate being 3.50% per annum. This would be 2.75% lower from the policy repo rate of 6.25%. Notably, 3.50% interest rate remains unchanged currently. 

Unlike savers, borrowers opting for short term loan will directly benefit from policy repo rate cut ahead. SBI has now kept all cash credit accounts and overdrafts with limits above Rs 1 lakh linked with repo rate of 6.25% with a spread of 2.25%. This would mean now borrowers who seek such loans will see 8.50% interest rate.