SBI's rate cuts unlikely to impact deposits, for now

SBI manages nearly 70 per cent of the banking activity, and though the break-up of its deposits isn't publicly available, sources indicated that the composition wouldn't differ largely. 
Image used for representation. (Photo | File/Reuters)
Image used for representation. (Photo | File/Reuters)

HYDERABAD: Begninng today, SBI's revised deposit rates will be effective, but there's no reason for customers to fret.

Though the country's largest lender slashed rates by 5-75 bps, a granular view of the composition of deposits confirms that the rate reduction was at best an act of chucking a bone at the government and the RBI, who in turn were jawboning banks to reduce rates. 

Consider this. The sharpest reduction of 50-75 bps was on deposits between 7 days and up to six months, while the rest of the tenors saw rates reduce by a lowly 5-20 bps. It means, for every Rs 1 lakh, interest on deposits for up to 6 months will fetch Rs 500 to Rs 700 lower, but on other tenors, the difference is an insignificant Rs 50 and Rs 200. 

Interestingly, short-term deposits comprise as little as 10 per cent of the total banking industry's deposits, while 1-2 year deposits comprise a lion's share accounting for 45 per cent, which is why SBI was mindful and deployed a feather-touch 20 bps cut. 

Similarly, deposits for two years and above account for nearly 33 per cent, while 6 months to 1-year deposits account for 12 per cent. Here too SBI remained cautious, lowering rates by a piffling 5-15 bps, in line with small savings schemes like post office deposits and National Savings Certificates, on which the government lowered rates by a pitiful 10 bps last month. 

SBI manages nearly 70 per cent of the banking activity, and though the break-up of its deposits isn't publicly available, sources indicated that the composition wouldn't differ largely. 

Predominantly, short-term deposits are parked by businesses to meet their short-term liquidity needs and strictly not viewed as income-yielding assets. Hence interest rate differential is unlikely to scurry them over to other products. 

On the other hand, it's the conservative households who indulge in deposits of larger tenors and a significant reduction could upset their wealth creation plans. They may even be tempted to beetle off to other products including gold or equities or to private lenders like IDFC First, which offers 8.5 per cent interest on two-year deposits, which is higher than the public provident funds rate. 

Lending rates will be cheaper only when deposit rates fall. But such a move could lead to depositor flight from banks, as customers mount a search for better returns. "Banks unwillingness to lower deposit rates is also due to the interest rate risk premium, which will reduce only when the ongoing NBFC crisis is resolved," reasoned Prasanna Tantri, Assistant Professor, and Senior Associate Director, Center for Analytical Finance, ISB.

The central bank lowered policy rates by 75 bps in the past six months, but banks passed on just 20-25 bps to customers. On the contrary, fresh lending rates increased by 10 bps in May over the previous month to 9.9 per cent, as per the RBI's latest data on system-wide lending and deposit rates. While private banks' rates on fresh loans rose by 20 bps at 10.6 per cent, they however reduced by 5 bps among state-run banks to 9.3 per cent. 

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