SBI move may ignite a rate war among PSU, private banks

In a surprise move on Monday, India's largest lender State Bank of India cut interest rate on savings bank accounts by 50 basis points to 3.5 per cent on balance of Rs 1 crore and below, after over six years of status quo. About 90 per cent of SBI's savings bank accounts have balances of under Rs 1 crore and this latest move could lead to a margin improvement of 10-15 basis points.

"Real interest rates are really high, the interest on savings bank was 3.5 per cent in April 2011 and there was a negative carry of nearly 5 per cent," said Rajnish Kumar, MD, SBI. "But today if we look at inflation and all other benchmark rates there is a positive carry of nearly 2.4 per cent. The choice before the bank was either to raise MCLR or reduce the savings bank interest rate, we decided upon the latter."

SBI's rate cut could ignite a rate war among the large state-run and private banks, but most mid-sized and small finance banks hungry to gain incremental market share could decide to hold rates.

While the immediate savings for the bank will be reflected in its September quarter earnings, most analysts feel it is too early to evaluate if this would lead to a long-term margin improvement as most leading banks have posted declines in net interest margins over the last one year.



"Investors should view this as a leading indicator to continued softening of rates, while theoretically, this should result in savings in funding costs, we view this as structurally margin neutral," said Gautam Chhugani, director, India financials, Sanford C.Bernstein. "We believe SBI will be able to stem their margin decline in the near term but the impact could be quite limited in the longrun as lending rates continue to soften as well."

Prior to the interest rate deregulation in October 2011, SBI had maintained a savings bank interest rate of 3.5 per cent since March 2003. The staterun lender held Rs 9.4 lakh crore as savings bank deposits at the end of June 2017, out of its total deposits of nearly Rs 20.5 lakh crore."Significant amount has gone out of the inflow that we saw during demonetisation," said Anshula Kant, CFO, SBI.