Fresh lending rates fell by a mere 10 basis points in February to 9.8 per cent, while term deposits, which have seen an upward trajectory for some time, stabilised at 6.9 per cent. Latest RBI data shows that term deposit rates remained flat at 6.9 per cent in February. It may be recalled that deposit rates had seen strong upward movement from November 2017 to March 2018 to 6.7 per cent, but remained flat thereafter with a marginal 15 basis point increase until September 2018 to 6.8 per cent. An additional 10 basis points followed during Q3 of FY19.
Wholesale deposit cost saw a robust increase in March by 15 basis points, while average term deposit rates remained broadly similar to term deposit rates (1-2 years). This is, however, slightly lower than rates offered by small finance banks offering relatively higher deposit rates to attract customers. Overall, deposit rates will likely remain stable over the near-term, though gradual rise in cash deposit (CD) ratio might push some private banks to raise deposit rates in an environment of strong loan growth, according to Kotak Institutional Securities.
As for lending rates, fresh loans saw 10 basis point decrease in February to 9.8 per cent after recording a sharp increase in January, driven by 15 basis point M0M drop in fresh lending rates of state-run banks to 9.3 per cent. Private lenders’ rate basket stood flat at 10.7 per cent. Weighted average lending rates too remained flat at 10.4 per cent, following the past seven-month trend.
Increase in MCLR rates slowed down between January and March 2019, after a robust increase between May and September 2018. While some banks decreased MCLR rates by 5-10 basis points in March, with deposit rates broadly stable, a swift rise in MCLR rates is less likely. The wedge between outstanding and fresh lending rates widened by 10 basis points in January to 55 basis points.
The gap has been in the range of 50-70 basis points during July 2008-February 2019. Spreads for PSU banks increased M0M by 10 basis points to 65 basis points in February 2019, while that of private banks decreased 5 basis points MoM to 0.4 per cent. The gradual rise in yields has led to a situation where spread between bank funding and bond rates have gradually started to converge, the brokerage noted.
Meanwhile, with gradual revival in lending from state-run banks (5 PCA banks exited PCA framework) and flat loan growth at 15 per cent, private banks will gradually soften growth trends leading to reduction in CD ratio (operate at over 90 per cent CD ratio) and will reduce pressure on private banks to borrow at higher rates as passing the benefit was challenging, Kotak said.