Why SBI reduced savings rate to historic low of 2.75%

The largest bank in the country, the State Bank of India (SBI) has taken a lead in reducing savings rate to a low of 2.75 per cent per annum. Clearly, other banks too will follow suit. Banks generally offer 3-4 per cent on savings bank accounts. So what prompted the largest bank to go for a savings rate cut?

Why run around for deposits when there is enough liquidity available from the Reserve Bank of India (RBI) repo window at 4.40 per cent. The RBI is also offering durable long term liquidity of 1-3 years at a rate around repo rate. The cost of raising deposits with no options to deploy them immediately makes a case for offering low rates at the current juncture and come back when the credit picks up.

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In fact, banks have generated enormous amount of liquidity from RBI's decision to reduce the cash reserve ratio (CRR). The existing deposits of Rs 100 had earlier meant that the bank had to deposit Rs 4 with the RBI. The 100 basis points reduction is now releasing some Rs 1.37 lakh crore into the banking system.

Second, the RBI is also discouraging banks from parking their money under its reverse repo window by reducing the reverse repo rate to 4 per cent. So why raise money from deposits, which apart from interest outgo includes other costs, and park it with RBI at just 4 per cent. It makes sense to reduce the savings rate and wait for the demand for credit to pick up.

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There is also a heightened risk perception in many of the loan segments. The retail loans, which were growing the fastest, are now looking risky with the coronavirus lockdown and the likely fall in growth momentum. Unsecured loans are no longer safe in the current environment where job losses are going to rise.

The banks are also going to be focused on recovery and collection in the next six months to one year.

Last but not the least, government has also cut the postal savings rates. The post office time deposit offers 5.5 per cent for one to three years and 6.7 per cent for 5 years. While the post office savings rate is at 4 per cent, the sharpest reduction in the post savings is anyway clearing the grounds for banks for customers to migrate.

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