#FinancialBytes: About SBI's interest rate-repo rate linkage and its impact
State Bank of India (SBI) is the largest public sector bank in the country with more than 42 crore customers. The state-owned lender, on 1 May, became the first bank in the country to link its savings account deposit and loan interest rates to the repo rate of the Reserve Bank of India (RBI). Here's all about the State Bank's move and its impact.
What is RBI's repo rate?
Repo rate is the rate at which the Reserve Bank of India lends funds to commercial banks in the country. RBI uses the repo rate as a tool to control the supply of money in the economy. Repo rate is also used to control inflation where the Reserve Bank increases it to lower inflation. Repo rate cuts usually make loans cheaper.
Interest on short-term loans, savings account linked to repo rate
SBI had, in March, announced that it will link the interest rate on short-term loans like cash credit accounts and overdrafts and as savings accounts with balance more than Rs. 1 lakh to the RBI's repo rate from 1 May. This means that the interest on SBI's large savings accounts deposits and some short-term loans will change automatically whenever RBI changes the repo rate.
Lesser interest on savings accounts with balances over Rs. 1L
With SBI's interest rate-repo rate linkage, the interest on savings accounts with balances over Rs. 1 lakh decreased from 3.5% to 3.25%. SBI, however, excluded savings account customers with balances less than Rs. 1 lakh and borrowers with up to Rs. 1 lakh overdraft/cash credit limit from the linkage. This means, customers with savings account balances below Rs. 1 lakh will earn 3.5% interest.
This is how post-linkage changes might affect customers' EMIs
Meanwhile, SBI's home loans still remain linked to its MCLR. Since home loan EMIs are linked to SBI's MCLR, the bank has to lower its MCLR to lower its lending rate, which means paying less interest to its depositors. Notably, SBI recently reduced interest rates by 0.1% on home loans of up to Rs. 30 lakh and its MCLR by 0.05% across all tenures.
Changes in the interest on short-term loans
While short-term loans like cash credit accounts and overdrafts with up to Rs. 1 lakh limit are exempted, short-term loans with limits above Rs. 1 lakh have been linked to repo rate from 1 May. Such loans will attract an interest rate of around 8.25%.