The State Bank of India (SBI), the premier banking institution in the country, has overhauled its method of setting interest rates on savings bank deposits and short term loans. Instead of the earlier model tied to the Marginal Cost of Funds based Lending Rate (MCLR), SBI has now linked these rates to the Reserve Bank of India’s (RBI) repo rate. This significant transition brings with it a new era of transparency and faster transmission of rates.
Changing Practices: SBI Adopts Repo Rate
The strategic shift from the MCLR to the RBI’s repo rate means that SBI’s interest rates will now hinge on the rate at which RBI lends funds to banks. Currently, this repo rate stands at 6%. The bank has linked savings deposits with balances exceeding Rs 1 lakh to this repo rate, abandoning the previous MCLR-based system.
Understanding MCLR
Marginal Cost of Funds based Lending Rate (MCLR) is the lowest interest rate at which a bank can lend. It is determined by a host of factors such as fixed deposit rates, the source of the funds, and the prevailing savings rate. In exceptional circumstances, the RBI can authorize lending at rates below the MCLR.
Benefits of Repo Rate Linking
There are several advantages to employing an external benchmark like the repo rate. The primary benefit is the enhanced transparency it lends to the process of setting interest rates. Moreover, it allows for a quicker transmission of rates, enabling customers to reap the benefits of any changes in policy more rapidly.
| Fact | Detail |
|---|---|
| Savings Deposits Linked | Deposits over Rs 1 lakh |
| New Benchmark | Reserve Bank of India’s Repo Rate |
| Legacy Benchmark | Marginal Cost of Funds Based Lending Rate (MCLR) |
| Current Repo Rate | 6% |
The RBI’s Proposal: A Shift Towards External Benchmarks
In its monetary policy meeting in December 2018, the RBI had suggested linking fresh floating-rate retail loans and loans to micro and small enterprises to an external benchmark such as the repo rate or Treasury Bill rate from April 1, 2019. The Treasury Bill is a short-term debt issuance from the Government of India, issued at a discount and redeemed at face value upon maturity. However, due to opposition from other banks, the RBI decided on April 4 to put this proposal on hold.
A New Era of Interest Rate Stability?
Despite resistance from some quarters, SBI’s move to link savings bank deposits and short term loans to the repo rate could herald a new era of stability and transparency in interest rates. It remains to be seen how other banks respond to this development and whether they choose to follow in SBI’s footsteps.
