In a first-of-its-kind move that will ensure faster monetary transmission, the nation's largest lender State Bank of India (SBI) announced linking of its savings deposits rates and short-term loans to the Reserve Bank of India's (RBI) repo rate.

The new rates, linked to the external benchmark rate, would be effective May 1, the bank said in a late evening statement. The move would help speed up the monetary transmission process wherein lenders pass on RBI's rate cuts as well as hikes to borrowers. The RBI has been unhappy with delays in transmission of rate cut benefits by the banks.

SBI said it would exempt savings bank account holders with balances up to Rs 1 lakh and borrowers with cash credit accounts and overdraft limits up to Rs 1 lakh from linkage to the repo rate. This would insulate small deposit-holders and small borrowers from the movement of external benchmarks.

"To address the concern of rigidities in the balance sheet structure and address the issue of quick transmission of changes in the RBI policy rates, effective May 1, 2019, we've taken the lead in linking key pricing decision for savings bank deposits and short-term loans to the repo rate of the RBI," SBI said.

Savings bank deposits above Rs 1 lakh constitutes around 33 percent of SBI's total deposit books, SBI Managing Director PK Gupta said. Currently, the bank is offering an interest rate of 3.50 per cent for savings bank deposits up to Rs 1 crore and 4 per cent for deposits above Rs 1 crore, he added.

"This is a major policy decision we have taken. A 25 basis points reduction in the repo rate can result in a 7-8 basis points cut in our MCLR now," Gupta told PTI. The new regime would be applicable only for those with a balance of over Rs 1 lakh in their accounts. Currently, the repo rate is 6.25 percent.

To discuss SBI's new announcement, CNBC-TV18's Latha Venkatesh joined by RK Bakshi, former executive director of Bank of Baroda; Neeraj Gambhir, money market expert; Srikanth Vadlamani, vice president of Financial Institutions Group, Moody's and VG Kannan, chief executive at Indian Banks' Association.

Kannan said, "The original announcement in the policy was for all retail loans. Be it your personal loans or SME. We had also represented saying that three benchmarks will not have any direct correlation with the cost of deposits and therefore, having a benchmark where the liability side is not having any relationship will have a huge repercussion on the banks."

Bakshi, said, “Till now, particularly the larger and old banks have been following the same practise vis-à-vis their Marginal Cost of Funds-based Lending Rate (MCLR) or their deposit rates. For saving bank deposits, some banks are paying even up to seven percent. The new private sector smaller banks are paying six and seven percent consistently. But the larger public sector banks and even the larger private sector banks have stuck to 3.5 percent. So, there has been a uniformity and harmony between the banks. Now, the SBI has taken this step which is very befitting to the largest bank of India."

Gambhir said, “First of all, it is a big step by SBI as for the last 15-20 years, the RBI has been trying to enforce some kind of market-linked pricing into the market. This is the first time when a big bank for a big size of this book has taken this decision, so it is an important decision for the banking industry as a whole."

Vadlamani said, "SBI is such a huge player in the market and other market players at some point will have to follow. Having said that, the key point, here is that deposit growth has been significantly lagging the loan growth. So, I am not sure if there is a significant avenue for banks to cut deposit rates at a time when they need to spruce up deposit rates to grow. "