The country’s largest lender, State Bank of India 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.
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%.