State Bank of India has announced that it is reducing the rate of interest it offers to depositors on products like fixed deposits (FDs) with effect from February 10, 2020. The reduction varies from 10 basis points to 50 basis points. The only term spared is the 7 days to 45 days.
Interestingly, after its monetary policy review meeting, the Reserve Bank of India had left the interest rates untouched.
State Bank of India has seemingly referred to surplus liquidity in the system for its decision to cut down on the interest rates on term deposits. For the banks, the interest outgo on deposits has to match the revenue it earns from the loans and other lending activities to remain profitable. This balancing act has to be constantly engaged in by the banks. For a large bank like State Bank of India, even a few basis points could make a lot of difference as far as profit or loss is concerned.
The banks have also been left with very little manoeuvrability since the RBI is insisting on a more transparent interest rate regime in their loan products and to link the interest rates to external benchmarks like the repo rate. This makes it very difficult to manage their finances and the only option left for them is to hold back on the interest paid on term deposits to boost revenue.
Coming back to the new rates of interest on term deposits announced by SBI, as mentioned, the rate for the 7days to 45 days will remain the same at 4.5%; 46 days to 179 days, it will be 5% (from 5.5%); from 180 days to 210 days and 211 days to less than 1 year, the same 5.5% will be applicable (used to be 5.8%) and for 1 year to 10 years, the new rate effective February 10 will be 6%, down from 6.1% now.
These rates are for retail deposits of less than ₹2 crore. For senior citizens, you can add 0.5% across all these tenures.
The decrease in the rates of interest for the wholesale deposits (usually by companies) will vary from 0.25% to 0.5% depending on the term duration.
There will be some downward adjustments in the interest rates charged by SBI on the retail loans as well.