After months of hand-wringing, lending and deposit rates of banks are going down. While fresh lending rates for the month of June fell 20 bps to 9.7 per cent over the previous month, term deposits stabilised at 6.8 per cent, which analysts believe will decline further in coming weeks.
As per data released by the RBI last week on system-wise lending and deposit rates, the gap between outstanding loan and fresh loan rates widened to 75 bps, led largely by the reduction among private banks to the tune of 20 bps. Add to this, the recent 35 bps repo rate reduction, the marginal cost of funds based lending rate (MCLR), below which banks cannot lend, will likely to fall further in the coming months.
“Fresh lending rates are likely to decline further from here due to a decline in policy rates and as most banks are focusing on higher share of low-yielding retail products,” according to a note by Kotak Institutional Equities Research. The note further said that lending for better-rated corporates will increase.
On the other hand, term deposit rates broadly stabilised after witnessing steep rises throughout the financial year 2019. With a gradual revival in lending from public sector banks and weaker loan growth at 12 per cent, private banks will gradually soften growth trends leading to a reduction in certificate of deposit (CD) ratio. This will reduce pressure on private banks to borrow at higher rates as passing the benefit was challenging, Kotak Institutional Equities Research noted.
However, weighted average term deposit rates continue to be sticky despite pressure from both the government and the Reserve Bank of India (RBI) to reduce lending rates. Wholesale deposit costs, as measured by credit-deposit rates, fell sharply by 100 bps in July, while average term deposit rates remained broadly similar to term deposit rates offered by most banks.
Meanwhile, fresh lending rates declined 20 bps in June to 9.7 per cent, driven by 30 bps decrease over last month among private banks to 10.3 per cent. State-run lenders, however, remained firm with rates dropping by a mere 5 bps over the last month to 9.3 per cent.
Weighted average lending rates were flat over last month at 10.4 per cent, but up by 20 bps year-on-year (y-oy). Marginal Cost of Funds based Lending rates remained stable for private banks over the past three months, while public sector banks witnessed decline of 10 bps since May this year.
The gap between outstanding and fresh lending rates has been broadly in the range of 50-70 bps since July 2018. Spreads for private banks increased 25 bps to 85 bps in the month of June over May, while for PSU banks it was up by 10 bps to 75 bps. The gradual decline in yields has led to a situation, where spreads between bank funding and bond rates have gradually started to converge, according to Kotak Institutional Equities Research.