Smart Cut by State Bank of India

1. SBI has declared that it will link its Savings Deposits of over 1 lac to the repo rate and will fix it at 275 basis points below the repo rate which is 3.5% as on date.
2. Also, on loans, SBI will link all cash credit limits and working capital to the repo rate fixing them at 225 basis points.
3. This will be effective from 1^st May 2019.

What would be the effect?

• As of now deposits above Rs. 1 lakh form around 32% of SBI’s total deposits.
• SBI’s total Cash Credit and allied loans form around 25% of their total loan portfolio.
• Also, the loans part of the bank form around 70% of the bank’s deposits.
• This means, when RBI cuts its rates, a large portion of the bank’s deposits becoming cheaper, and a small portion of loans will yield less interest.
• Precisely, SBI on one hand would have passed on the rate cuts to the customers, but at the same time would be a winner too.

Large Private Sector Banks:

• Banks like HDFC, ICICI and Axis may not have much of deposits above Rs. 1 lac on the Liability side of their Balance, however, on the loan side, they have around 50% of their Loans Portfolio as Retail Loans.
• Also, with a tough competition from SBI, these banks may lower lending rates in the way SBI has done, and bring down their Savings Deposit rate for large accounts.
• However, the problem will be meagre for smaller PSU Banks, which have a lower Savings Deposits and higher exposure to Cash Credit and may see an erosion in the margins.
• It is also felt that as per RBI’s directive insists that the rate cuts announced by RBI, may be passed on to the customers, which obviously should mean that banks try to link their Term Deposits but floating rate deposits are not clicking with depositors which is said to be the reason for such a move.

Shortcomings:

There are also fears of shortcomings in the above:

1. In line with the SBI move, other banks may also try to cut their rates and bring a parity but it may not work well with public opinion since the rate cuts may not work well with the Retail Loans.
2. Also, after the first rate cut, depositors may take a move to shift their funds above Rs.1 lac from the Savings Deposits to the Term Deposits which may compel the banks to improvise on the loan side in order to keep their margins intact.
3. Also, any change in the fixed income market may bring more money into bank deposits and lowering of interest may be overlooked by depositors.
4. What would happen when the interest rate cycle turns when SBI and other banks will be forced to raise the rates immediately for both deposits and cash credit accounts which will force them to find some adaptations.
5. Another point to be noted is transmission is bound to happen with the bond market. As of now, rate cuts are not getting percolated since the Government is borrowing more than usual and this has kept the yields high.

Conclusion:

• A move intended to transmit rate cycle may end up deadening bond markets. It may be termed to be a decline instead of a reform.
• It can otherwise may be described to be a temporary adjustment.