SBI loans to get cheaper but interest on savings accounts takes hit under new rules

State Bank of India (SBI), the country's largest lender, on Wednesday, linked loan and deposit rates to the repo rate of Reserve Bank of India (RBI). As a result, customers will be able to get loans at cheaper rates.

SBI will become the first in India to adopt an external benchmark to set rates. At present, most banks finalise their loan interest rates on the basis of the Marginal Cost of Fund Base Lending Rate (MCLR).

However, the SBI has decided to link the repo rate to loan interest, which will make some loans cheaper. The interest rate has been cut by 10 basis points for home loans of up to Rs 30 lakh. It is currently in the range of 8.6 to 8.9 per cent.

But the country's largest bank has also reduced the interest rate on savings accounts. The interest rate with a balance above Rs 1 lakh will be 2.75 per cent lower than the RBI's repo rate, which currently stands at 6 per cent. That means the customers will earn an interest of 3.25 per cent. The interest rate may move up or down depending on what stance the RBI takes in bi-monthly monetary policy meeting.

The current effective rate on savings deposits is 3.50 per annum, 2.50 percentage points below the current repo rate of 6 per cent.

But customers having SBI savings account with a balance up to Rs 1 lakh will not be affected by the new move. Those with less than Rs 1 lakh in their savings accounts will continue to earn interest at the rate of 3.5 per cent. The SBI was earlier paying interest of 3.5 per cent for savings bank deposits up to Rs 1 crore and 4 per cent for deposits above Rs 1 crore.

SBI has clearly mentioned that all cash credit accounts and overdrafts with limits up to Rs 1 lakh (short-term loans) will also be linked to the RBI's repo rate along with with an additional 2.25 per cent, taking the total rate to 8.25 per cent.

SBI says that the new rules will ensure faster monetary policy transmission.