The rate of decline in fresh lending and deposit rates has started to slow down, according to an analysis of the latest Reserve Bank of India (RBI) data by Kotak Securities.

Deposits rates were flat month-on-month (mom) at about 5.6 per cent in November 2020. Fresh lending rates were down about 5 basis points (bps) mom to about 8.3 per cent in the month, the stock broking firm said in a report.

Referring to the spread between average lending rate on outstanding and fresh loans staying around110 bps, the report said: “High spreads do not augur well as it still shows reluctance to lend, in our view.” One basis point is equal to one-hundredth of a percentage point. “While the overall lending rates have declined when we look at the headline rates, the transmission is probably slower when we look at various products or risk segments.”

“In a relatively low growth and heightened risk environment, especially after Covid, we note that the spreads have continued to remain high,”according to authors MB Mahesh, Nischint Chawathe, Abhijeet Sakhare, Ashlesh Sonje and Dipanjan Ghosh.

The spread over G-Sec (government security) with deposits and loan rates has widened, implying banks are seeing lower spreads on investments and better spreads on loan yields, they added. “While we are witnessing some positive trends on recovery in loan enquiries, we still believe that there is still some time before it reflects in loan growth,” the authors opined.

Term deposit rates flat

The report observed that weighted average TD (term deposit) rates were flat mom, for both private and PSU (public sector undertaking) banks. Private and PSU banks have reduced their TD rates by about 110 bps and about 90 bps respectively over the past twelve months.

Wholesale deposit cost (as measured by Certificate of Deposit rates) has seen a much sharper decline of about 320 bps in FY2020, followed by a further decline of about 180 bps in YTD (year-to-date)FY2021, the report noted.

“We have started to see banks, especially private banks, cutting headline TD rates in the past few quarters. The gap between repo and 1-year TD rate for SBI (State Bank of India) has been flat about 90 bps after declining from peak levels of about 130 bps,” the authors said.

Fresh lending rates down marginally

The report observed that private sector banks saw a decline of about 10 bps mom in lending rates on fresh loans to about 8.9 per cent, while PSU banks showed about 10 bps decline.

The authors assessed that the gap between fresh lending rates of private and PSU banks now stands around the 100 bps average level seen over the past twelve months.

Lending rates on outstanding loans were marginally down mom to about 9.4 per cent in November 2020, having declined about 80 bps since November 2019, they added.

“Banks have been cutting their MCLR (marginal cost of funds based lending rate) over the past few months. Private banks and PSU banks have cut their MCLR by an average of about 90-100 bps in the past 12 months,” the report said.

The gap between outstanding and fresh lending rates has been in the range of 110-140 bps for the past nine months.

Related Topics