Has the recent fall in deposit rates pinched you? Then, SBI’s decision to retain its savings deposit rate (for deposits over ₹1 lakh) at 3 per cent should offer you some respite.

The RBI lowered its key policy rate by 35 bps in August. Since then, banks have been lowering fixed deposit and lending rates. But depositors holding SBI savings accounts, had an additional burden to bear. Effective May this year, SBI linked the interest rate on its savings bank deposits (for balances above Rs 1 lakh) with the repo rate — 2.75 per cent below repo rate, retaining 3.5 per cent rate for deposits up to Rs 1 lakh.

The RBI’s 35 bps reduction in repo rate would have lowered SBI’s savings deposit rate (for balances above Rs 1 lakh) to a very low 2.65 per cent from September. Given that most banks offer 3.5 per cent for their low-value savings deposits (for deposits up to Rs 25-50 lakh), SBI’s meagre rates on savings deposits would have hurt depositors. SBI’s move to retain its existing rate on savings deposits, despite the RBI’s rate cut has, hence, eased the pain.

But for SBI, the decision can lead to earnings volatility as it has linked some of its short-term loans and home loans to the repo rate. No trickle down benefit of lower savings deposit rate, as was expected earlier, could pinch the bank, as it continues to lower its lending rate.

No gain when rates rise?

SBI’s decision to not lower rates in its savings deposits would come as a big relief to depositors, who have felt short-changed in the past. While banks are always quick to cut deposit rates in a falling rate cycle, they are somewhat tardy in hiking rates in a rising rate cycle.

But SBI’s move also throws up some questions. Will the bank also exercise this option — to retain rates on savings deposits — in a rising rate scenario? After all, if and when the RBI hikes the repo rate, savings account depositors would hope to gain from SBI’s repo linked product. This is because since the rate on the savings deposit was deregulated in October 2011, banks have not tinkered with the rates -- nearly all banks have kept it at 4 per cent.

It was only in July 2017, for the first time, that SBI moved to lower the rate on savings deposits to 3.5 per cent, with other banks quickly following suit.

But in 2018, when rates started to rise, SBI and other banks did not revise the savings deposit rates up. It appeared that depositors, who were stuck with a meagre 4 per cent rate for over half-a-decade, would continue to be stuck with lower rates (of 3.5 per cent) for another long period of time.

SBI’s move to link its savings deposit to the repo rate in May, could have resolved the issue of cartelisation, as depositors hoped that the bank would also hike savings deposit rates now, if and when RBI hikes rate.

But with SBI’s decision to retain rates (though beneficial for savers), it is uncertain what it would do in a rising rate cycle.

Could hurt earnings

Along with savings deposits, SBI also linked its short-term loans to the RBI’s repo rate in May this year. It also introduced a repo-linked home loan product in July.

Repricing some of its deposits (savings) with every RBI rate action, would have helped cushion the earnings volatility arising on account of pegging some of its lending rates to the repo rate.

This is because, when lending rates are pegged to external benchmarks, it would imply faster reset of loan rates. This would mean that banks will have to create a portfolio of deposits and loans with a balanced mix across tenors such that the overall asset-liability gaps are managed well, not only to reduce liquidity mismatches but also to mitigate earnings volatility.

While one way to do this would be to take more short-term deposits that get repriced faster, it could lead to a liquidity gap. The other way would be to develop floating rate fixed deposits, with which banks have had little success until now.

By linking savings deposit rates to an external benchmark — repo rate — SBI had sought to resolve the dilemma. For large banks such as SBI, the savings deposits form 25-35 per cent of deposits. Repricing them faster can lead to notable gains on cost of funds in a rate cut scenario, aiding better transmission to lending rates without hurting earnings much.

It needs to be seen how the SBI’s decision to not lower its savings deposit rate, which could have mitigated earnings volatility, impacts the bank.