First Off The Block

The State Bank of India is the first to link a part of its deposits and lending to an external benchmark. Savings deposits of over Rs 1 lakh are linked to 2.75 per cent minus the repo rate of 6.25 per cent. Similarly, cash credit of over Rs 1 lakh is linked to 2.25 per cent plus the repo rate. The objective is to encourage faster transmission of any repo rate cut or hike by the central bank. While this is a commendable move, there is a lot more to be done both by the SBI as well as by the banking industry. Deposits and loans across categories should ideally be linked to an external benchmark.

Easier said than done. Banks operate in a very competitive environment. The current low deposit growth restricts banks' ability to cut rates. The new private banks and other new differentiated banks (Payments and small finance) are offering higher savings rates as they are in the process of building deposits and acquiring customers. Banks' margins are also under pressure due to higher NPAs and provisioning rules. So why transmit the benefit of a cut to borrowers? For transmission to be effective and faster, deposits - that are constituting the bulk of the banks' cost of funds - have to reduce faster. The repo borrowing from RBI is marginal, and will alone not bring a change.