SBI, IDBI Bank toe govt line, cut deposit rates

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Moral suasion on banks to bring down interest rates appears to have worked. The country’s largest lender, State Bank of India, and IDBI Bank have announced up to 50 bps reduction in their term deposit rates. IDBI has also cut its home loan rates on loans that have lower margins, effective March 3.

Of the two moves, SBI’s deposit rate cut is more significant as the reduction will provide the bank with headroom to reduce lending rates. While IDBI’s deposit rate cut is effective March 6, SBI’s rates will change from March 2009.

Although SBI has the widest branch network, it was offering a peak rate of 9% on its 1,000-day deposits. This was higher than rates offered by some of the larger public sector banks and has enabled SBI to significantly increase its market share. The reduction in deposit rates will now enable some of the smaller banks to reduce their term deposit rates as they have benchmarked their term deposit rates above SBI to avoid a flight of deposits.

This is the first time this year that SBI has cut interest rates on retail deposits. However, the bank had sharply reduced interest rates on bulk deposits along with other banks to 7.5%. SBI has indicated that it will raise tier-II capital by issuing subordinated debt to retail investors. The bank was looking at issuing these bonds below 9%. Bankers point out that the issue could be sold only if the bank reduced interest on term deposits below 9%.

Following the rate revision, SBI will offer 8.10% on 1-2 year deposits as against 8.5% earlier. Two to three year deposits will attract an interest rate of 8.25% against 8.75% earlier. The special category of 1,000-day deposits will now fetch 8.5% return against 9%.

IDBI, after its rate cut, will offer floating rate home loans up to Rs 20 lakh at 9.75% and will charge 10.25% for loans above Rs 20 lakh. Simultaneously, the margin on home loans has also been reduced to 15% from 20% for loans up to Rs 30 lakh, and to 20% from 25% for loans above Rs 30 lakh. The existing fixed rates of interest for the Special Scheme Home Loans, that is 8.25% up to Rs 5 lakh and 9.25% from Rs 5 lakh–20 lakh, will continue.

Banks including SBI have been subject to moral suasion from RBI and the government to reduce lending rates in order to revive demand. RBI in its January 2009 policy pointed out that banks had not yet passed on the benefits of lower interest rates to their borrowers. In their meeting with the central bank last week, bankers said one of the impediment to lower interest rates was high deposit rates.

After a day after RBI raised the issue of interest rate cuts in its meeting with bank chiefs, Union Bank of India and Punjab National Bank announced cuts on auto and home loan rates. PNB also reduced its interest rates on some term deposits by 50 basis points.

Source-Economic Times
March 2009

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