The largest bank in the country, the State Bank of India (SBI) has made a beginning by linking the savings rate and also short term loan interest rate to an external benchmark i.e repo rate, the rate at which the banks borrow funds from the Reserve Bank of India. The savings deposit rate for deposits over Rs 1 lakh will be 2.75 per cent minus the repo rate of 6.25 per cent, which means the interest rate would be 3.50 per cent. Similarly, the cash credit of over Rs 1 lakh will be 2.25 per cent plus the repo rate of 6.25 per cent, which means 8.50 per cent. This selective move will certainly pave the way for better transmission of rates to borrowers in the longer run for all kinds of loans. But will other banks follow suit?

Low deposit growth

The deposit growth is low in the market whereas the credit growth is slowly moving up. Take for example, the deposit growth rate which used to be 18 per cent plus in 2011 has now moved to below 10 per cent. There is already a scramble to garner deposits to fund the asset growth.

Private banks offering higher interest rates

There is a competition for deposits in the market. The private banks and new payments and small finance banks are offering higher savings rate. This rate ranges from 5-7 per cent for deposits over Rs 1 lakh. The SBI has linked its savings deposits of over Rs 1 lakh to repo rate, which offers 3.50 per cent. There may be shift to fixed deposits within the same bank. Take for example, SBI, which offers 5.75 - 6.40 per cent for a year on term deposits below Rs 1 crore. Kotak Bank offers a savings rate of 6 per cent for deposits of over Rs 1 lakh and up to a crore.

Low repo borrowings

The bulk of the bank's cost of fund is dependent on deposits, which include current, savings and fixed deposits. The repo borrowing is generally for mismatches, which constitutes 5-10 per cent. So to make an impact, the deposit rates have to go down in totality. And if the overall cost of funds comes down, there will be more interest rate benefit to the customers.

Margins under pressure

Currently, the bank's margins are also under pressure because of deterioration in asset quality and higher provisioning for stressed assets. In these tough times, some banks will certainly resist a transmission of interest rates so as to protect their margins.

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