In the week gone by, the country's leading state-run lender State Bank of India (SBI) announced that it will link its savings deposits as well as short term loan rates to RBI's repo rate. Repo rate is the rate at which commercial bank borrows funds from the RBI. After the RBI's sixth bi-month monetary policy review meet on February 7th, the repo rate has been surprisingly revised lower by 25 basis points to 6.25% in comparison to 6.5% earlier. One basis point is one-hundredth of a percentage point.
Last week, SBI said that it will link all of the bank's short term lending products including working capital loan and cash credit limits with repo rate. Also, the bank will link its savings deposits of more than Rs. 1 lakh to repo rate. For these products, banks fixed the interest rate at a spread of 2.25% above the repo rate.
Here's the likely impact of the linking of savings deposits and loan rates to the repo rate:
Impact on savings deposits account holder:
So, accordingly with the linking of SBI's savings deposits account with the repo rate, return for the account holder will increase with the increase in repo rate and vice-versa. It is to be noted that the norm does not holds for savings accounts with deposits of less than Rs. 1 lakh. And for such accounts, rates applicable before the announcement shall be followed.
Currently, SBI provides 3.5% interest rate per annum on deposits up to Rs. 1 crore, while for deposits over Rs. 1 crore, the bank offers an interest rate of 4% per annum.
Impact on short term borrowers
Short term borrowers of SBI with cash credit or overdraft limit of over Rs. 1 lakh will have to comply with the new linking rule that links loan products with the RBI's repo rate. So, for them EMIs against their borrowings will depend on the increase or decrease in repo rate. Notably other short term borrowers of the bank with limits up to Rs. 1 lakh, will not be impacted by the bank's latest move.