DeMo bites savers

Mumbai, July 31: The SBI has cut the savings bank deposit rate to its lowest level in six years for most savers because demonetisation has saddled it with an avalanche of cash and it is expecting a reduction in lending rates in two days.

Savings accounts with Rs 1 crore and less in the country’s largest bank will now earn interest at the rate of 3.5 per cent, down by 50 basis points.

Deposits above Rs 1 crore will continue to fetch 4 per cent as earlier. But 90 per cent of the Rs 9 lakh crore deposits in the SBI do not cross Rs 1 crore. The two-tier interest structure – one at the rate of 3.5 per cent and the other at 4 per cent – came into effect from Monday.

This is the first time in recent memory that a public sector bank is cutting the interest rate for savings bank deposits. Usually, these deposits, which affect a large section of the population, are spared and banks tinker with the rates on term or fixed deposits.

The reduction, the SBI said, comes “on the back of large inflows in savings and current accounts during the demonetisation period in November and December 2016”.

It added: “The decline in the rate of inflation, high real interest rates and the expected softening of interest rates are the other considerations warranting a revision in the rate of interest on savings bank.”

Translated, the statement means that banks are flush with cash after the note recall and prospective borrowers are not expected to take loans unless the interest rates are cut.

The situation reflects the bankers’ dilemma: if they keep on accepting deposits, on which they have to pay interest, and are unable to disburse loans – which earn them higher interest – they will end up paying more than what they earn.

From the bank’s point of view, it makes financial sense to cut deposit rates when lending rates are expected to fall. The RBI’s monetary policy committee, which decides the benchmark rates that set the banking industry standards, is meeting for two days from tomorrow.

Some banking sources said the SBI’s timing was unusual and the cut may have been intended at pressuring the RBI to reduce rates.

For a government keen on projecting a pro-poor and middle-class-friendly image, the savings bank rate cut will be an unpalatable proposition although it has been nudging the RBI to set the stage for a cut in lending rates.

A question that is certain to be thrown up would be why savers are earning less and industry is reluctant to take loans and invest if the economy is in fine fettle as the Narendra Modi government has been claiming.

The political leadership can, of course, claim that the SBI took a business decision and the government has little to do with it.

Since bank interest rates were deregulated in 2011, a few private sector banks have raised the rate on the higher side and have been offering 6 per cent on savings deposits against the industry average of 4 per cent.

The last time the SBI’s savings bank rate was 3.5 per cent was during the eight-year phase from 2003 to 2011. Since then, it had moved up to 4 per cent, which has now been partially lowered.

SBI managing director Rajnish Kumar said the 4 per cent interest rate on savings bank accounts had remained static since 2011, although the overall interest rate as well as retail inflation had come down.

Kumar said the choice before the bank was to either raise the marginal cost of lending rates (MCLR) or cut savings bank interest rates.

“We did not consider it appropriate to raise the MCLR, because for segments such as agriculture, small and medium enterprises, retail housing and affordable housing, the cost and EMI would have gone up,” he added.

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