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EconomyWhy SBI hiked interest on savings amid trend of increasing lending rate

Why SBI hiked interest on savings amid trend of increasing lending rate

When for years, Indians have seen the Reserve Bank of India (RBI) increase repo rates, forcing banks to increase their lending rates and thus ad to the burden of the middle class that lives on equated monthly instalments for things bought on credit, State Bank of India (SBI) has hiked the interest rates on saving bank deposits by 30 basis points to 3.0% for balances of Rs 10 crore and above. The interest rates for deposits below Rs 10 crore remain unchanged at 2.70%. The revised rates are applicable from 15 onwards, the country's largest bank said in a statement.

This is because the competition for attracting funds has turned intense. Senior SBI executives said some institutions and government departments maintained funds in savings accounts too while these have drawn money predominantly from the retail sector: households and individuals. Retail funds are more stable than institutional money, which is volatile. So the bank has to offer sops to retain and get money from them.

Banks are now in a cut-throat competition of rates for term deposits of Rs 2 crore and more (bulk deposits) and so the savings account cannot stay away from this trend, the SBI executives say. And there is little possibility of a revision in the savings rate for deposits of up to Rs 10 crore, SBI executives say, as there is no pressure for the same. However, the bank is keeping an eye on the situation, as there is a growing gap between credit and the amount mobilised through deposits.

The share of CASA (current accounts and savings accounts) in total deposits was 45.33% as of 30 June, down marginally from 45.97% a year ago. SBI's CASA deposits grew by 6.54% year on year (YoY) to Rs 17.68 trillion by June 2022-end.

Deposit rates have not moved in tandem with lending rates despite the monetary policy committee (MPC) of the Reserve Bank of India (RBI) raising the benchmark repo rate by 190 bps since May this year. This has weighed on the deposit growth seen in the economy so far. According to the latest RBI data, for the fortnight that ended on 23 September, deposits grew by 9.2% year on year (YoY) but credit growth was 16.4%. The credit-deposit growth gap has been widening for the past few months, exacerbating analysts' concerns that slow deposit growth could act as a constraint for loan growth going forward.

However, with banking system liquidity shrinking as RBI pulls out the excess liquidity to tame inflation and high economic credit growth, industry experts suggested that sooner rather than later banks have to increase deposit rates to garner durable liquidity to credit growth in the system.

RBI said in its October bulletin that the banks raised their term deposit rates in H1 of 2022-23 amid moderation in systemic liquidity. Banks increased their bulk term deposit rates more relative to retail deposit rates. The weighted average domestic term deposit rate (WADTDR) on fresh retail deposits rose by 39 bps during May-August 2022, while the WADTDR on total new deposits (both retail and bulk) was up by 100 bps. The median term deposit rate on fresh retail deposits – the prevailing card rates – rose by 26 bps during May-September 2022.

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