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Indian Economy

In a first of its kind, State Bank of India has decided to link the interest rate paid on savings bank balance of over Rs. 1 lakh to the repo rate — the key policy rate set by Reserve Bank of India.

Also, the bank will link cash credit accounts and overdrafts, with limits above Rs. 1 lakh, to the repo rate. The new system will come into effect from May 1, SBI said in a statement.

The move comes ahead of the April 1 deadline for banks to link the lending rate to the external benchmark which is aimed at increasing the effectiveness of monetary transmission. Most banks are likely to link their lending rates to the repo rate.

“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; effective from May 1, 2019, SBI has taken the lead in linking its key pricing decision for savings bank deposits and short term loans to the repo rate ,” the lender said. At present, SBI’s savings bank rate is 3.5%, which is 2.75 % below current repo rate of 6.25%.

With the interest rates starting to move downwards, and RBI being expected to lower the interest rate once again in April, the savings bank interest rate is expected to come down further. The floor rate for all cash credit accounts and overdrafts with limits above Rs. 1 lakh, is 8.5%, that is, after adding a spread of 2.25% to the repo rate.

“The risk premiums over and above this floor rate of 8.5 % would be based on the risk profile of the borrower, as is the current practice,” SBI said.

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