SBI’s new rule
Public sector lender State Bank of India (SBI) became the first Indian bank to link its savings and loan interest rates to the Reserve Bank of India (RBI)’s repo rate starting May 1. The move was taken with an aim to ensure faster monetary transmission.
What does it mean
This means that people having a savings bank account in SBI, the country's largest lender, with balance exceeding Rs 1 lakh will now earn a quarter percentage point less interest.
Current repo rate
After back-to-back rate cuts, the repo rate currently stands at 6 per cent. While, the reverse repo rate stands at 5.75 per cent.
New rate of interest
The interest rate on savings bank accounts with balances above Rs 1 lakh will be 2.75 per cent below the RBI's repo rate. This means that new interest rate will be 3.25 per cent (6 per cent - 2.75 per cent = 3.25 per cent). This interest is credited on a quarterly basis.
Interest on balance below Rs 1 lakh
For account holders with less than Rs 1 lakh balance, the interest rate will continue to be 3.5 per cent.
How change in repo rate affect interest rate
The interest rate on such balances will change according to the repo rate. If RBI hikes repo rate, the interest rate will also go up. On the other hand, it may fall further if repo rate continues its downward journey.
Previous interest rates
Till April 30, savings bank deposits exceeding Rs 1 lakh but up to Rs 1 crore were fetching an interest rate of 3.5 per cent and deposits above Rs 1 crore were at 4 per cent.
Interest on cash credit accounts and overdrafts
The lender said that all cash credit accounts and overdrafts with limits above Rs 1 lakh will also be linked to the benchmark policy rate, plus a spread of 2.25 per cent -- that amounts to 8.25 per cent.
What RBI had said on floating loans rates
In December 2018, the RBI had proposed to link floating rates on personal, home, auto and micro and small enterprises loans to external benchmarks like repo rate or treasury yields from April 1, 2019. However, the deadline was later deferred.
System followed by banks
As of now, banks follow a system of internal benchmarks, including Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base rate and Marginal Cost of Funds based Lending Rate (MCLR).