The State Bank of India, the country's largest bank, will reduce interest rates on term deposits across various maturities by 25 basis points from Monday to bring down its cost of funds. It is expected to review lending rates towards the end of the month.
This is the fourth cut in term deposit rates by SBI since April and has brought the cumulative reduction to 150 basis points. The new rates will be applicable to fresh deposits and those that come up for renewal.
Since December, deposit rates have come down by up to 300 basis points. In contrast, the benchmark prime lending rate has been cut by 150 basis points.
SBI Chairman O P Bhatt had said last week that there was scope to cut lending and deposit by 25 basis points. Earlier this week, Finance Minister Pranab Mukherjee had prodded public sector banks to cut lending rates further.
While other public sector banks like Punjab National Bank have slashed their lending rates by up to 300 basis points, SBI has gone for a lower reduction as its net interest margin -- the difference between the lending and the cost of funds -- had dropped by 14 basis points to 2.93 per cent during the 12 months ended March 2009.
The bank is trying to ensure that its NIM stays above 3 per cent but is grappling with high-cost funds mopped up in the third quarter of the last financial year when it was raising over Rs 1,000 crore (Rs 10 billion) a day by paying 10.5 per cent a year to retail depositors.
SBI's cost of deposit for 2008-09 was 6.30 per cent, up from 5.59 per cent for 2007-08.
Following SBI's latest move, which comes three days after the meeting with Mukherjee, other banks are also expected to lower rates. Bank of India Executive Director B A Prabhakar said there was room for a cut of 50 basis points in the deposit rates.
Asked about the benchmark prime lending rate, an SBI executive said that the bank's first priority was to bring down the cost of funds and then pass on the benefit to customers.
