The liquidity control measures announced on account of unprecedented exchange rate pressure, forced banks to borrow at a higher cost from RBIs marginal standing facility (MSF). The MSF rate which was hiked to 10.25% in July. Even though it has now been brought down to 9%, most banks have seen an increase in their cost of funds.
The increase in MSF rate has resulted in an increase of funding cost 20 basis points (bps) quarter-on-quarter in the July-September period, RBI said in the report. This rise was mainly with respect to short-term maturities of up to 180 days, reflecting the tightening of liquidity conditions.
The higher cost of funds was passed on to borrowers by most banks with the weighted average loan rate (WALR) on fresh rupee loans sanctioned by banks rising sharply by 42 bps between June and August to 12.04%.
Although the base rate remained unchanged at 10.25% in the second quarter, the weighted average lending rate (WALR) on the outstanding bank loans increased marginally by 4 bps (q-o-q) to 12.15% in August 2013, the report said.
Despite higher rates charged by banks, industry flocked to bank credit due to a sharp rise in market borrowing costs via the commercial paper market. As a result, RBI noted that non-food credit growth has risen to 17.9% as on October 4, from 14% on July 12. This was largely supported by corporate firms substituting their market borrowings, especially through commercial paper (CP) by bank borrowings, explains RBI.
This substitution occurred as money market rates, including discount rates on CPs firmed up and primary market conditions remained subdued, RBI said in the report. RBI said a closer inspection of credit growth indicates that there is a broad based growth in credit to industry and the services sector.
Overall industrial credit growth year-on-year was at 17.6% in end-September 2013, with sectors such as basic metals, chemicals, infrastructure, cement, gems and jewellery, wood and food processing registering an above industry average growth.