In fact, lending rates increased 16 basis points for private banks on a monthly basis.
Lending rates fell in March from their February levels, but the simultaneous need to increase deposit rates may be causing spreads to peak. The marginal loan spread (the interest rate on new loans minus new deposits) for the banking system has come out of the maximum levels and has been reduced by 16 basis points (bp) in March compared to February 2021, according to data released by the Reserve Bank of India (RBI).
At the same time, spreads remained high at an average of 4.6% for private banks and 3.2% for public sector banks (PSB). The differential between the average lending rate of current and new loans was 120 bp. While overall rates have fallen, spreads between long and short, as well as between AAA and AA, have remained high, suggesting that spreads on both product and duration loans are quite high, Kotak Institutional Equities said. (KIE).
Analysts said that several factors may have contributed to keeping spreads high despite the lack of borrowing. These include the participation of fixed-rate loans in the mix, higher-yielding unsecured loans (which are also fixed-rate), and prices that seek to offset the impact of higher bad assets.
Banks had obtained higher margins during the Covid phase, as credit disintermediation was low and they could set better prices for products, according to a note from Nomura. This could be set to change. “Assuming the cyclical recovery in loan demand picks up, banks may need to increase their retail deposit rates, even when wholesale deposit rates are below the lows since January 21. With the new loans discounted from the ‘repo’, a slower monetary policy movement by the RBI may be negative for NIM, on the margins, “said the brokerage.
Furthermore, the recent narrowing of spreads came largely as a result of a drop in the average interest rate on new loans for foreign banks, which fell 80 bp month-on-month (MoM) in March. At the system level, the average interest rate on new loans decreased only 16 bps. In fact, lending rates increased 16 basis points for private banks on a monthly basis.
Rate transmission is therefore much slower than headline numbers suggest. “In an environment of relatively low growth and higher risk, especially after Covid, we see that spreads have remained high,” KIE said, adding that the spread between G-secs with deposits and loan rates has widened. This implies that banks are seeing a lower spread on investments and better spreads on loan yields.
Recently, the president of the State Bank of India (SBI), Dinesh Khara, said that the bank will try to keep interest rates low for as long as possible in order to support economic growth. It is not clear how long banks will be able to do this, especially considering that there have already been a number of hikes in deposit rates. SBI, Housing Development Finance Corporation (HDFC) and Canara Bank have raised deposit rates in recent months.
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