State Bank of India (SBI), the country’s largest bank with almost a quarter share of the banking business, has decided to fully pass on the reduction in Repo rate by 25 basis points by the Reserve Bank of India to its customers of cash credit (CC) and overdraft (OD) [limits above Rs 1 lakh] with effect from July 1, 2019.
According to SBI, the effective Repo Linked Lending Rate (RLLR) for CC and OD customers will be 8 per cent. The bank has also introduced repo-linked loan product for home loans with effect from July 1, 2019. As per SBI’s formula announced in May, the new rate for savings bank deposits above Rs 1 lakh and up to Rs 1 crore will be 2.75 per cent below the current repo rate. The current Repo rate is 5.75 per cent.
In May, SBI linked its interest rates on savings bank deposits and short term loans to the repo rate of the RBI. SBI went ahead even though RBI had deferred the plan to link the rate of interest to external benchmarks like the repo rate or Treasury Bill rate following opposition from other banks.
Savings account deposits with balances less than Rs 1 lakh will continue to earn 3.5 per cent interest – the same as the old rate fixed for these accounts. This interest rate is also subject to change by the bank as per RBI rules, but it will not be reset automatically as the repo rate moves.
Many banks were lobbying against linking loans to an external benchmark rate, fearing a fall in margins. On April 4, the RBI announced that it has put on hold its proposal to link interest rates on deposits and short-term loans to an external benchmark like the repo rate or Treasury Bill “taking into account the feedback received during discussions held with stakeholders on issues such as management of interest rate risk by banks from fixed interest rate linked liabilities against floating interest rate linked assets and the related difficulties and the lead time required for IT system upgradation”.