The decision by the State Bank of India (SBI) to link its short-term loans and savings deposits above Rs one lakh to the repo rate will have a less-than-desired impact on retail borrowers.

Any reduction by the Reserve Bank of India (RBI) in the policy repo rate will have an indirect effect on the interest rates on home and other retail loans — but not to the entire extent.

At present, housing, auto and other retail loans are linked to the marginal cost of funds-based lending rate (MCLR).

The SBI intends to continue with this link even in the new regime. It is learnt the impact will be around 8-10 basis points.

So, if the RBI were to bring down the repo rate by 25 basis points, MCLR could go down 8-10 basis points, which is not much different from the current trend with respect to the amount of the cut.

The only relief will be a swifter transmission of any monetary policy changes.

Last month, the RBI had cut the repo rate by 25 basis points to 6.25 per cent. However, banks have so far reduced their MCLR by 5-10 basis points. The SBI had cut its home loan rates by only five basis points.

Last week, the country’s largest lender had announced it will link its large savings deposits and short-term loans to the repo rate. From May 1, savings bank deposits with balance above Rs 1 lakh will earn an interest of 3.5 per cent, 2.75 per cent lower than the repo rate. Balance below Rs one lakh will earn four per cent. The latter, however, will not be linked to the repo rate.

The bank has also linked all cash credit accounts and overdrafts with limits above Rs 1 lakh to the repo rate plus a spread of 2.25 per cent.

After the cut, SBI chairman Rajnish Kumar had said the current system of pricing its retail loans in relation to MCLR is working well and the system will continue.

He said it was not possible to constantly change the rates on long-term loans.

Experts feel other banks will follow the SBI, though the rates on large savings deposits could turn volatile.

“Despite a recent cut in the repo rate, banks were struggling to reduce their lending and deposit rates as the deposit accretion continues to lag credit growth,” Anil Gupta, vice-president & sector head — financial sector ratings — Icra said.

“Linking the savings deposit rate with policy rate will help faster re-pricing of liabilities for banks and help in protecting their profit margins,” Gupta said.