State-owned banking giant State Bank of India yesterday announced a sharp hike in lending and fixed deposit rates effective May 12. Last week, the Reserve Bank of India acted to contain inflation, which stubbornly remained higher than its targeted range (even after being revised repeatedly). The central bank hiked the repo and reverse repo rates by 50 basis points and hiked the interest rates on savings bank balances to 4% from 3.5%.
While banks could have held on to lending rates for some time, despite repo rates going up, the hike in the savings bank balance translates to an immediate jump in costs. Banks treasure low cost current account and savings account balances, lovingly called CASA in the trade. Technically, Casa deposits are short term in nature and could vanish overnight.
In reality, they don’t go anywhere as people keep a significant sum of their cash in savings accounts.
SBI has been going all out to increase its level of Casa deposits, which rose to over 48% of total deposits as of end-December, compared to 43% in the same period a year ago. That’s about Rs 422,000 crore of deposits, and when you have to pay half a percentage point for it, that’s Rs 530 crore extra per quarter for SBI, or nearly 19% of its net profit in the December quarter. No wonder then that SBI wasted no time in hiking rates.
Apart from the hike in the base rate by 75 basis points to 9.25%, the bank has taken an equal increase in the benchmark prime lending rate to 14%. In deposits, the bank has left longer term deposit rates untouched but has hiked rates for shorter term deposits, up to six months. The rate hike varies from 75 basis points to 225 basis points. The minimum interest rate will go up from 4% to 6.25% for 7-14 day deposits and six-month deposits will now earn 7% instead of 6% earlier.
The rate hike will mean higher lending costs, making loans expensive. Depositors will find a reason to smile as their returns on short term deposits will increase significantly. SBI’s move will prompt a similar move by most public sector banks –some have already done so- and other private sector banks as well.