In fact, lending rates increased 16bp for private banks on a MoM basis.
Lending rates fell in March from their February levels, but the simultaneous need to raise deposit rates may cause spreads to spike. The marginal lending spread – the interest rate on new loans minus new deposits – for the banking system broke from peak levels and narrowed by 16 basis points (bps) 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 4.6% on average for private banks and 3.2% for public sector banks (PSBs). The spread between the average loan rate on outstanding loans and fresh loans was 120 bps. While policy rates have fallen, the spreads between long term and short term as well as between AAA and AA have remained high, suggesting that the spreads on loans both in terms of products and terms are quite high. high, said Kotak Institutional Equities (KIE).
Analysts said a number of factors may have helped keep spreads high despite a lack of credit drawdown. These include the share of fixed rate loans in the mix, higher yielding unsecured loans (which are also fixed rate) and prices that aim to offset the impact of increasing bad debts. .
According to a note from Nomura, banks had obtained higher spreads during the Covid phase because credit disintermediation was weak and they could price products better. It could change. “Assuming the cyclical recovery in loan demand picks up, banks may need to increase their retail deposit rates, even though wholesale deposit rates are at their lowest since January 21. With the new loans valued out of the “repo,” a slower monetary policy move by the RBI could be negative for NIM, at the margin, ”the brokerage firm said.
In addition, the recent decline in spreads has come largely from a drop in the average rate on loans on new loans to foreign banks, which fell by 80 basis points per month (MoM) in March. At the system level, the average lending rate on new loans declined by only 16 basis points. In fact, lending rates increased 16bp for private banks on a MoM basis.
The speed transmission is therefore much slower than what the figures suggest. “In a relatively weak growth and heightened risk environment, especially after Covid, we note that spreads have continued to remain high,” KIE said, adding that the spread on G-secs with deposits and rates of credit has widened. This implies that banks see a lower spread on investments and better spreads on loan returns.
Recently, State Bank of India (SBI) Chairman Dinesh Khara said the bank will try to keep interest rates low for as long as possible in order to support economic growth. It is not known how long the banks will be able to do this, especially since a series of deposit rate hikes have already taken place. SBI, Housing Development Finance Corporation (HDFC) and Canara Bank have raised deposit rates in recent months.
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