Repo-linked deposit & loan rates: In whose interest is it any way?
From May 1, 2019, all savings deposits above Rs 1 lakh would be priced 275 bps below repo rate.
The impact of this move would, however, well be understood once one can establish savings behaviour during various interest rate cycles and reaction from corporates.
SBI’s new product is where the underlying interest rate is linked to external benchmarks on certain asset and liability products. From May 1, 2019, all savings deposits above Rs 1 lakh would be priced 275 bps below repo rate while cash credit loans higher than Rs 1 lakh would be priced at 225bps above repo rate.
The spread can be higher based on the overall risk assessment of the bank. The impact of the change would be negligible since the amounts are largely similar. However, the medium-term impact would be contingent on internal variables such as would-be customer behaviour during different interest rate regimes and external variables such as competitor reaction to such products and the ability to shift deposits and loans to competing lenders.
So far, banks have been hesitant in introducing such products for fear of losing market share on deposits during declining interest rates or its impact on earnings. SBI had met with limited success when it had offered variable interest rates on term deposits in the past. So, we need to wait for next two years or so to understand the acceptance of this product.
Liability customer behaviour may not necessarily be rate-sensitive as it was thought to be. Public banks have lost market share but very gradually, in spite of private banks offering higher rates. Rural and semi-urban markets have seen a rise in savings accounts share irrespective of interest rates. A variable interest rate may not necessarily be negative for customers.
A move towards market benchmark even if it is only for 25 per cent of the borrowers would still be a painful transition since it would be the third change in the past few years from PLR/base rate and MCLR. Banks and borrowers are currently facing limited choices as there is a strong view for introduction of rates that are transparent and formats that can be quickly transmitted when there is a regulatory change.