State Bank of India has decided to launch a floating rate term deposit product with returns linked to the base rate.
The floating rate term deposit is being launched to correct interest rate mismatches arising from floating rate assets being financed with fixed rate liabilities, said Mr S.S. Ranjan, Deputy Managing Director, SBI.
To be introduced from September 6, a one-year floating rate deposit will earn interest which is 50 basis points below the base rate (7.50 per cent) i.e. 7 per cent. A three-year deposit will fetch a return which is 25 basis points below the base rate i.e. 7.25 per cent and a five-year deposit will carry interest equal to the base rate i.e. 7.50 per cent.
When compared with the revised domestic term deposit rates, the floating rate term deposits appear attractively priced.
A depositor parking funds in plain vanilla term deposits of up to one year and up to three year maturities earns 6 per cent and 7 per cent interest respectively. Deposits parked for up to five years carries 7.25 per cent interest.
Customer interest
Steady returns is what customers look for while placing deposits with banks. In a rising interest rate scenario, customers could be benefited due to the likelihood of the base rate getting revised upwards. However, in a falling interest rate scenario, the depositors' returns could be adversely impacted, say bankers.
A private sector bank had introduced a floating rate term deposit product linked to the Mumbai Interbank Offered Rate about four-five years ago. However, it did not see much investor appetite.
In view of credit growth outpacing deposit growth even as the banking system is reeling under liquidity crunch, SBI has raised term deposit rates by 25 to 150 basis points across various maturity buckets.
Simultaneously, to protect its margins, it has revised its benchmark prime lending rate (BPLR) for borrowers, who had taken loan before the base rate linked lending regime came into effect from July 1, by 50 basis points to 12.25 per cent.
The deposit (of up to Rs 1 crore) as well as BPLR hikes are effective from August 17.
Hike rates
The bank has effected the highest hike of 150 basis points on ultra short tenure deposits (15 days to 45 days). Deposits in this maturity bucket will carry 4 per cent interest. The lowest rate hike is of 25 basis points on ultra long tenure deposits (8 years and up to 10 years). Deposits in this maturity bucket will earn 7.75 per cent interest.
In the last couple of weeks, banks such as Punjab National Bank, Union Bank of India, Bank of India, IDBI Bank, Canara Bank, Allahabad Bank and Oriental Bank of Commerce have raised their BPLR and deposit rates. The quantum of hike in BPLR and deposit rates is 25-50 basis points and 25-125 basis points respectively.
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