Page 36 - Banking Finance December 2019

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deposit rate above Rs. 1 lakh is 3.0 per cent. Consequently,
savings deposits above Rs. 1 lakh will be shifted to term
deposits. This would increase the cost of funds for SBI and
therefore, pass-through of rate cut benefit to borrowers will
be difficult without reducing the margin. If the SBI
appropriately adjusts spreads to maintain the margin, there
would be no transmission. CC/OD base lending rates would
be 8%.

Long-term solutions

Banks in western countries generally rely on short-term funds
and offer variable interest rate on deposits, well below LIBOR.

In April 2019 Reserve Bank of India (RBI) has postponed its Hence, in western countries, banks conveniently set their
decision to peg all floating rate loans such as home, car and lending rates above LIBOR, which cover cost of funds and a
SME loans to external benchmarks. The central bank while spread depending on the risk profile of borrowers. A similar
unveiling the situation is yet to emerge in India.
(i) Management of interest rate risk by banks from fixed
interest rate linked liabilities against floating interest It is too early to claim that FBIL has been successful in giving
rate linked assets and the related difficulties, and LIBOR-like benchmarks to the Indian financial system. Given
(ii) The lead time required for IT system upgradation, the RBI's commitment to maintain price stability under the
flexible inflation targeting, the CPI inflation can be used as
It has been decided to hold further consultations with a suitable external benchmark for the purpose of pricing of
stakeholders and work out an effective mechanism for both deposit and lending rates.
transmission of rates, "RBI said in its statement.
As Repo Rate is interest rate administered by the Monetary
The SBI has adopted the Repo Rate as an external benchmark Policy Committee and does not emerge from the market, it
for pricing savings deposit and all cash credit (CC) and is not a suitable external benchmark for the purpose of
overdraft (OD) above Rs. 1 lakh, effective from May 1, 2019. pricing of both deposit and lending rates. It is better to
While CC/OD lending rates would be at least Repo Rate plus nurture financial markets to increase their depth and price
225 basis points (bps), saving deposits above Rs. 1 lakh would discovery of financial products, which would eventually
fetch Repo Rate minus 275 bps. It is not clear whether these improve the process of monetary policy transmission.
spreads are fixed for a considerable period or can be reset References
every time there is a change in the Repo Rate.
https://www.thehindubusinessline.com/
The implications https://economictimes.indiatimes.com/news/

After the Repo Rate cut in the June 2019 policy, savings https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx

Airtel customers to get life cover under plan
Bharti Airtel’s prepaid mobile customers will now get life insurance cover from Bharti Axa under a partnership deal
between the two companies, upon subscribing to Rs 599 plan. Bharti Airtel announced a new pre-paid plan priced at
Rs 599 bundled with 2GB data per day, unlimited calls to any network and 100 SMS per day, and also offers Rs 4 lakh
life insurance cover from Bharti AXA Life Insurance. "The recharge comes with a validity of 84 days and the insurance
cover continues automatically for three months with every recharge. The life insurance cover, which is available to all
customers aged 18-54 years, requires no paperwork or medical examination and the certificate of insurance will be
instantaneously delivered digitally," a joint statement said.

36 | 2019 | DECEMBER | BANKING FINANCE