SBI loan rates 2019: The country’s largest commercial bank, State Bank of India (SBI), will use the Reserve Bank of India’s (RBI’s) policy repo rate as a base to set the savings deposit rates and short-term loan rates from May 1 this year. It is for the first time that the bank has announced to link interest rates on deposits and loans to a benchmark outside the bank. The bank’s decision to link its interest rate decisions on savings bank deposits and short-term loans to the repo rate will assist in removing rigidities in the balance sheet, ensuring an immediate transmission of changes in the RBI’s policy rates, according to SBI. The largest lender will link savings bank deposits with balances above Rs 1 lakh to the repo rate. While the current rate on savings deposits is 3.50 per cent per year, i.e 2.75 per cent below the current repo rate of 6.25 per cent. 

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Banks were earlier facing pressure to lower their lending and deposit rates as the deposit growth continued to lag credit growth. However, reducing the deposit rate was not a viable option for banks amid slow growth in deposits. With SBI taking the lead, other PSU banks are also likely to adopt the same system of linking interest rates with repo rate soon.

In SBI, short-term loans like cash credit (CC) accounts and overdrafts (OD) above Rs 1 lakh will be linked to the repo rate (current repo rate 6.25 per cent plus a spread of 2.25 per cent). While risk premiums above this floor rate of 8.50 per cent would depend on the risk profile of the borrower as per current bank norms.

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SBI will be exempting the savings bank account holders with balances above Rs 1 lakh and borrowers with their CC/OD limits up to Rs 1 lakh from this. So, it is clear the reduction in repo rate will be directly transferred to the customers seeking short-term loans while cutting on their payable interests. 

According to a survey by an Indian Banks’ Association-Ficci, the system of pricing loans and deposits using external benchmarks could be a problem for people as it would bring volatility in interest rates because of frequent changes in customers’ monthly instalments. Also, the banks could set the spreads higher in the case of more volatility in benchmarks, the survey said.