The Telegraph
Since 1st March, 1999
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SBI slashes deposit rates again

Mumbai, Nov. 7: Deposits with State Bank of India (SBI) will earn 0.25-0.5 per cent less from Monday in a revision that the bank said was necessary to widen the gap between the interest it pays and the rate it charges on loans.

The cut stunned depositors because it came within four days of Reserve Bank’s credit policy, which left key rates, including the benchmark bank rate, on hold. The RBI asked banks to improve their credit delivery and even urged the nodal agency representing the banks to formulate ways to introduce a benchmark prime lending rate.

Though the central bank had insisted that the trend towards soft rate would continue, many expected commercial banks to hold their fire on another rate slash.

In an odd line of reasoning, SBI officials said they were only bringing deposit rates to levels that short-term instruments offered after a repo cut over two months back. A repo rate is the interest that RBI pays banks. It was last cut 0.5 per cent on August 25.

“Deposit rates were cut in May. We are yet to factor in August’s repo rate revision to 4.5 per cent,” an official said.

After the revision, SBI will pay 4 per cent on deposits of 15 to 45 days, down 0.25 per cent. Rates on all other deposits will tumble 50 basis points, including deposits of three years and above, where the interest will now be 5.50 per cent against 6 per cent earlier. Senior citizens will be given 0.5 per cent more at 6 per cent.

Other banks are expected to follow SBI over the next few days, riding rough-shod over rate-roiled depositors who appear to be paying the price for a big profit.

And, the hint that the banks’ bottomline would prevail over depositors’ wallets came from SBI chief A. K. Purwar himself when he hinted at today’s move hours after his bank reeled off its second-quarter results.

The fall in net interest margins to 2.8 per cent from 3 per cent is what SBI wants to check, but many argued if that was the only way the bank could boost profits.

With the redemption of the Resurgent India Bonds, the average cost of deposits at SBI will fall below 5.5 per cent. The cost of deposits fell from 6.6 per cent in the first half of 2001-02 to 5.8 per cent in the first half of this fiscal.

What could have loaded the dice in favour of a deposit rate cut could be the SBI’s swelling deposit base. Average deposits in India, excluding Resurgent India Bonds and India Millennium bonds, rose 11.2 per cent.

The bank did not pursue aggressively in retaining the redemption proceeds of RIBs. Of the bond redemptions to the tune of over Rs 25,000 crore in October, the bank has retained Rs 23,00 crore. It expected a reinvestment to the tune of Rs 3500-Rs 4000 crore.

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