Despite repeated reminders from Mint Street, banks remain unyielding on transmitting interest rate cuts. With system liquidity in surplus mode, the Reserve Bank of India, which reduced repo rate by 75 bps over the last six months, has been nudging lenders to lower interest rates, but to little effect. On the contrary, fresh lending rates increased by 10 bps in May over the previous month to 9.9 per cent, as per the RBI’s latest data on system-wide lending and deposit rates. While private banks’ rates on fresh loans rose by 20 basis points (bps) at 10.6 per cent, this figure fell by 5 bps among state-run banks to 9.3 per cent.
While weighted average lending rates stood flat at 10.4 per cent in May (they have remained so over the past nine months), the increase in MCLR rates — the individual benchmark rate below which banks won’t lend — slowed during Q4FY19 after a robust rise between May and September 2018. In the past three months, some banks have reduced MCLR by 5-15 bps.
In contrast, rates on term deposits stabilised around 6.9 per cent, while wholesale deposits’ costs stood flat so far in July after declining by 45 bps over the past three months. With deposit rates staying firm, a swift rise in MCLR rates appears less likely. Additionally, focus will shift on rate of translation of decline in repo rates to lending yields, according to the Kotak Institutional Equities Research.
The gap between outstanding loans and fresh loan rates now stands at 55 bps from about 70 bps a few months ago. Spreads of private banks fell by 20 bps m-o-m to 60 bps in May, while PSBs’ stayed flat at 65 bps.
“There’s still a meaningful difference between the lending yields and the corporate bond yield rate as the ability for corporates switch to bond market has been quite easy,” Kotak noted. The gap between weighted average lending rates and fresh lending rates fell from peak value of 85-95 bps in Q3 FY19 to 55 bps.