First Cut | SBI ups the ante, but banks unlikely to see any impact on margins

As the largest lender in the country, State Bank of India (SBI) has plenty of firsts to its credit. It added one more over the weekend with its decision to link a portion of its savings bank deposits as well as select loans to an external benchmark – the repo rate.

Incidentally, the Reserve Bank of India (RBI) in its fifth bi-monthly monetary policy statement in FY19 had recommended the use of an external benchmark for swifter transmission of policy rates. RBI had suggested banks should price their floating rate retail/MSME loans based on an external benchmark.

SBI has decided to price savings accounts with deposits above Rs 1 lakh at 2.75 percent below the prevailing repo rate of 6.25 percent. The effective rate works out to be 3.5 percent, which is same as the prevailing rate.

But a closer look shows SBI is actually placating the regulator without hurting its shareholders. As on December 2018, the share of savings account deposits in total deposits was 38.9 percent. According to SBI, close to 33 percent of its savings bank deposits are above Rs 1 lakh. Essentially, the move would impact close to 12.8 percent of its total liabilities.

On the asset side, SBI is linking external benchmarking to a similar sized exposure, thereby balancing assets and liabilities without hurting margin. On the advances side, the bank has announced cash credit accounts and overdraft facilities over Rs 1 lakh to be priced at 2.25 percent over the repo rate. At the prevailing repo rate of 6.25 percent, this would mean a floor price of 8.5 percent. The bank would charge a risk premium over the floor rate, depending on the credit quality of the borrower.

Will others follow?
That’s the key to watch out for. We definitely expect banks with a stable liability franchise to adopt similar asset-liability matching by linking to an external benchmark, without impacting margins.

Also see: SBI links deposit, loan interest to repo rates; experts believe other PSBs may follow

So, most private lenders with a superior liability profile will take on this challenge from SBI with élan. The entities that will feel the pinch would be banks with weaker liabilities (most public sector banks are fast losing their edge in garnering low cost deposits) and to that extent would be more disadvantaged and could lose market share.

But the weak competitive landscape, tighter liquidity and demise of weak non-banking financial companies (NBFCs) are resulting in a return of pricing power to banks. We do not see the challenge thrown by SBI as disruptive – it is unlikely to impact spread for the banking sector at this stage.