HOME > MARKETS > ECONOMY NEWS
  ECONOMY NEWS
ECONOMY
Link incremental bulk deposits to repo rate to reduce cost of funds: SBI Report
Aug-21-2019

In order to effective transmission of the Reserve Bank of India’s (RBI’s) lower policy rates, the State Bank of India (SBI) in its latest research report 'Ecowrap' has suggested that the regulator should ask banks to link incremental bulk deposits to repo rate as it would help in reducing cost of funds without hurting small depositors and senior citizens. However, it said that for external benchmarking, it is not possible for banks to only link the asset side of the balance sheet to an external benchmark creating significant asset-liability management (ALM).

As per the report, about 35% of bank liabilities are savings bank (SB) deposit. It added that the banks are also not able to link external benchmark to the entire liabilities especially time deposits, as the floating term deposits are not accepted by the Indian depositors and have already been unsuccessfully experimented by some peer banks in the country. Therefore, it said that the key to effective transmission is adjusting either SB or time deposits. SB deposits typically serve the transaction needs of the depositor. The option is always available with the customer to transfer the surplus SB balance to time deposits.

The report said that the problem is it cannot be done in isolation by any one bank and has to be enforced by the regulator. The best option could be that regulator enforces all incremental bulk deposits henceforth to be repo linked/flexible. The share of bulk deposits in banks' total deposits could be around 30% after the definitional change. It said most of the bulk deposits are from institutions and added that it is thus logical that large institutions could afford to take interest rate risk as this would spare the retail depositors from taking the same. It noted that bank deposit rates remain the largest constraining factor in rate transmission.

  RELATED NEWS >>