In a first-of-its kind move that will ensure faster monetary transmission, the nation's largest lender State Bank of India on Friday announced linking of its savings deposits rates and short-term loans to the RBI's repo rate.
The new rates linked the external benchmark rate of the repo rate, will be effective May 1, the bank said.
The move will to a large extent speed up the monetary transmission process -- which is banks passing on the rate cuts that the Reserve Bank announces to their borrowers without much delays -- something that has been missing all these while and something that the RBI has been unhappy with.
CNBC-TV18 spoke to Rajnish Kumar, chairman of SBI to discuss its impact.
Edited Excerpts:
Shereen: You have decided to pre-empt the move by the Reserve Bank of India (RBI). They have sought public comments on this external benchmarking which you have gone ahead and done it ostensibly to improve transmission. So, you are expecting that we are likely to see further cuts being announced by the RBI and hence the ability to be able to pass those through quickly?
There is no pre-emption as far as RBI guidelines on external benchmark are concerned. The existing guideline itself provides that we can link loans to Marginal Cost of Funds based Lending Rate (MCLR) or we can link loans to external benchmark, even now that provision is there. So, whatever decision we have taken, it has been taken in accordance with the existing guidelines of RBI.
About the transmission, there has been an issue and banks have always maintained that on liabilities side we do not have enough room or flexibility because all our liabilities structure is very rigid. So, unless we transmit rates on the liabilities side, we cannot transmit rates on the asset side. That is where after a lot of deliberations and internal discussions in our Asset-Liability Committee (ALCO), we thought that this was the only way where we can meet the requirement which RBI has expressed from time to time that transmission should happen.
Latha: What percentage of your savings deposits are above Rs 1 lakh and what percentage of your total deposits are above Rs 1 lakh savings deposits?
I cannot disclose all of my asset liability number. With this move the products which will be linked on the asset side and the balances above Rs 1 lakh on the savings bank side there will be a very big match between what you call the asset-liability match or mismatch.
Basically what we have done is, we have created flexibility on the liabilities side to respond to the changes in repo rate and accordingly as a result of that we change the lending rates on the asset side. Any good ALM practise would mean where the bank's net interest income or NIM remains protected irrespective of whatever is the movement in the market, that is the whole purpose of ALM.
So, our ALM now is much more balanced and relatively better aligned and the market fluctuations would not impact the bank's interest margin.
Latha: Any time in the near future are you going to extend these to term deposits, fixed deposits?
We tried it earlier with fixed deposits but it did not work. There was no demand for the variable rate linked fixed deposits. We had a product but the response was very poor.
Latha: With this linking at the moment your margins will improve because you have a very good spread -- 3.5 percent cost of money and lending rate is 8.5 percent, that is a solid spread, isn't it?
It is not like that. Our average cost of funds or cost of borrowing on which MCLR is determined is 6.02 percent. So, when one part or one component of savings bank becomes linked to repo rate, the average rate or average cost will move whenever there is a change in the repo rate and accordingly the average yield on advances will also move.
So, it should not be linked. If you link it, you will say that your current account is zero and you are charging 8.5 percent, then my spread is 8.5 percent and if I am paying on term deposits 7 percent then my spread is 1.5 percent. So, this is not the way to look at it.
Shereen: What is the expectation now given the fact that there are not just growth concerns domestically but also globally, what is the expectation on rates from hereon and action by the RBI?
There is a very wide expectation, not my expectation alone that in April if all the macro numbers -- inflation, external, crude oil price, dollar price, exchange rate -- depending upon those macros RBI will take a call but there is a big possibility that there will be a further cut in the repo rate.
Shereen: Would you like to quantify that? You are expecting another 25 basis point cut or perhaps even more?
A: 25 basis points cut is very likely. If it is 50 basis points then it will probably be a big surprise.
Shereen: There has also been the National Company Law Tribunal (NCLT) order that has come in on the Essar Steel matter, I just wanted to get your comments on the order and on one of the caveats where the NCLT seems to be suggesting that lenders give 15 percent of the total offer to operational creditors?
Whatever is the court's order, the committee of creditors will meet and definitely, they will take into consideration the observation of the NCLT bench. It will be again examined and see how we can take care of operational creditors.
Shereen: Do you anticipate that this is now going for a further challenge in a higher court? It has been over 580 days now, do you believe that you are anywhere close to a conclusion in this matter?
We will abide by the court order. As on date, it is NCLT order. So, the committee of creditors will abide by the NCLT order. There is a certain legal process, so if the matter goes to NCLAT, let it go but in my assessment now the matter is coming to a closure.
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