Notwithstanding the Reserve Bank of India’s (RBI) dovish leanings and a falling interest rate regime, fresh lending rates are on the rise. Latest RBI data shows that fresh lending rates increased 15 basis points (bps) in January to 9.9 per cent, after witnessing a marginal decline in December. While state-run banks saw a modest 7 bps increase at 9.5 per cent, private lenders on the other hand saw a strong 20 bps increase to 10.7 per cent. The rise in fresh lending rates was also partly driven by growth in lending to non-banking financial companies (NBFC) in January followed by growth in unsecured retail loans.
However, the gap between outstanding and fresh lending rates decreased 10 bps month-on-month (m-o-m) in January 2019 to 45 bps. The difference stood at about 50-70 bps during July-December 2018, but the gap converged sharply led by a robust increase in fresh lending rates. The gap between weighted average lending rates and fresh lending rates narrowed from a peak 85-95 bps in the second quarter of FY19 (Q2FY19) to 50 bps now.
On the other hand, term deposits have grown at a snail’s pace (weighted term deposit rates remained flat over the past four months), but inched up 5 bps in January over the previous month to 6.9 per cent. Term deposit rates, which surged between November 2017 and March 2018 by 20 bps to 6.7 per cent, fell flat subsequently with a marginal 15 bps rise until September, 2018 to 6.8 per cent. Considering the government’s decision not to lower interest rates on small savings schemes, bank deposit rates will likely be stable in the coming months and may even rise if loan rates do.
However, experts say fresh lending rates may not rise much, since companies focus on a higher share of low yielding retail products and lending to better rated corporates. “With a gradual revival in lending from PSU banks and flat loan growth at 15 per cent, private banks will gradually soften growth trends leading to a reduction in CD ratio. This will reduce pressure on private banks to borrow at higher rates as passing on the benefit was challenging,” Kotak Institutional Securities said in a note.
MCLR rates slowed down during the fourth quarter after a robust rise during May-September, 2018 and remained flat m-o-m in February (private banks at 9.3 per cent and 8.8 per cent for PSBs). Some even lowered MCLR rates by 5-10 bps in March, but with deposit rates broadly stable, a swift rise in MCLR rates is less likely, Kotak added.