SBI loan, bank deposits: RBI deregulates interest rate structure to help retail depositors

SBI loan, bank deposits: The Reserve Bank of India (RBI) has deregulated the interest rate structure and has moved from Prime Lending Rate (PLR) to Base rate to MCLR for better transmission. Recently, RBI has been pushing the banks to benchmark the loans to an external benchmark. However, for external benchmarking, it is not possible for banks to only link the asset side of the balance sheet to an external benchmark creating significant ALM mismatches (close to 35% of bank liabilities are Savings Bank Deposits). Further, the banks are also not able to link external benchmark to the entire liabilities (especially time deposits), as the floating term deposits are not accepted by the Indian depositors and have already been unsuccessfully experimented by some peer banks in India. 

Speaking on the RBI step Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI said, "The key to effective transmission thus we believe is adjusting either Savings Bank Deposits or Time Deposits. SB deposits typically serve the transaction needs of the depositor. The option is always available with the customer to transfer the surplus SB balance to time deposits. However, the problem is it cannot be done in isolation by any one bank and has to be enforced by the regulator."

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Dr. Ghosh went on to add that the best option could be that the regulator enforces all incremental bulk deposits henceforth to be repo linked /flexible. In India, single rupee deposits of Rs 2 crore and above are considered as bulk deposits and banks have the discretion to offer a differential rate of interest on bulk deposits. Recently, the largest commercial bank of India has offered personal loan up to Rs 20 lakh at a lowest interest rate starting at 10.75 per cent. It has also offered educational loans at an attractive interest rate starting from 8.25 per cent.

"The share of bulk deposits in banks’ total deposits could be around 30 per cent after the definitional change. Needless to say, most of the bulk deposits are from institutions. It is thus logical that large institutions could afford to take interest rate risk as this would spare the retail depositors from taking the same. We can at least initiate a discussion on this," said Dr. Ghosh.