Link bulk deposits to the repository for an effective transmission of interest rates: SBI report
New Delhi, August 20 () For an effective transmission of the lowest interest rates of the RBI, the country's largest lender, SBI, suggested on Tuesday to the regulator to ask the banks to link the incremental bulk deposits with the interest rate, as it would help reduce the cost of funds without hurting small ones. depositors and retirees.
The governor of the Reserve Bank of India, Shaktikanta Das, has emphasized the need for the entire banking system to link its loan and deposit prices with the repurchase rate (short-term borrowing rate) prescribed by the central bank. A dozen public sector banks, including the State Bank of India (SBI), have voluntarily linked their interest rates to the repository.
However, for the external benchmarking, it is not possible for banks to only link the assets side of the balance sheet to an external reference that creates significant asset and liability management (ALM), SBI said in its research report 'Ecowrap '.
About 35 percent of bank liabilities are deposits from savings banks (SB).
In addition, banks cannot link the external benchmark index with all liabilities (especially term deposits), since floating term deposits are not accepted by Indian depositors and some peer banks in the country have already experienced them without success. he added. .
The key to effective transmission, therefore, we believe, is to adjust SB or term deposits, the report said.
SB deposits generally meet the depositor's transaction needs. The option is always available with the client to transfer the excess SB balance to time deposits.
However, the problem is that it cannot do so in isolation from any bank and must be applied by the regulator, he said.
The best option we believe might be for the regulator to enforce all incremental bulk deposits from now on to be re-linked/flexible, said SBI Ecowrap.
In India, single-rupee deposits of Rs 2 crore and higher are considered bulk deposits and banks have the discretion to offer a differential interest rate on bulk deposits.
According to the report, the proportion of bulk deposits in total bank deposits could be around 30 percent after the change of definition.
Most of the bulk deposits come from institutions, according to the report, and adds that, therefore, it is logical that large institutions can assume the interest rate risk since this would prevent retail depositors from taking the same.
According to the study, bank deposit rates remain the biggest limiting factor in the transmission of rates.
For example, a cut of 100 basis points in deposit rates could result in a 45-50 basis point reduction in interest rates.
Interestingly, the small savings rate is not a limiting factor since small incremental savings collections are only 11% of incremental deposits!
However, in a developing country like India, reducing deposit rates always remains a challenge given that a large population of older people depends on interest income from deposits as a source of livelihood, he said. Timely transmission of the monetary policy rate as a whole is essential to ensure that beneficiaries receive or have the effect of changes in the bi-monthly monetary policy, according to the report. NKD CS HRS