Over the weekend, HDFC Bank raised deposit rates for maturities of between one and two years by 25-50 basis points while rates for maturities above three years have been upped by 150 basis points. Earlier this month, Union Bank offered savers 75 basis points more for one- and two-year money while IDBI Bank offered 25 basis points more for select maturities.
It won?t be long before other banks follow suit. Credit growth in the fortnight ended January 29 showed an uptick?net non-food credit was up 15.2% year-on-year, which is a good 80 basis points higher than it was in the previous fortnight ended January 14. The quantum of the increase, of close to Rs 19,000 crore in a matter of 15 days, clearly implies that big companies are once again in the market for money. The IndusInd Bank head had indicated that his bank was almost approaching the peak levels of lending seen in July 2008.
A glance at the incremental credit-deposit ratio (CDR), on a three-year trailing basis, indicates that it bottomed out around July-August and has since picked up. Indeed, the latest data shows that the incremental CDR is running above 100%, which means RBI?s 16% target for credit growth in 2009-10 may just be met.
So, it?s not surprising that banks are readying for a pick-up in loans, because if the economic environment continues to improve, there will soon be more takers for money. Also, with Rs 36,000 crore estimated to be drained out of the system, thanks to the increase in the cash reserve ratio, by the end of this month, banks will need to make sure they have enough of a pool to lend from. As of now, though, there seems to be enough liquidity in the system with the State Bank of India chairman asserting once again that lending rates are unlikely to rise in the next three to four months.
This means that much like what has happened in the cycle that started in October 2004, when banks started increasing rates, this time, too, the hike in lending rates will follow rather than accompany the deposit rate hikes. At that time, it was almost January 2006 before prime lending rates started moving up but this time lending rates will move up faster because the competitive intensity, especially for retail loans, will be far lower this time around.
Again, after interest rates peaked sometime in July 2008, and started to move downwards, banks were reluctant to trim deposit rates quickly, so the prime lending rate (PLR) descended more sharply. That left most banks with large amounts of high-borrowing costs and since the cost couldn?t be passed on in the midst of an economic downturn, it pressured their net interest margins (NIMs) in the first half of calendar 2009. Once deposit rates were reduced by 300 and 400 basis points, the lending spread (PLR/one-year deposit rate) moved up sharply.
In the past, for banks with strong liabilities or those with a big share of cheaper current and savings accounts (CASA), the rise in the blended deposit cost was much less?causing a pickup in lending spreads. A similar pattern should unfold in the current cycle except that the central bank has changed the manner in which interest will now be paid on savings balances. The hit to banks on their NIMs, once the new norms for paying customers interest on their savings balances are implemented, will be an estimated 10 and 15 basis points. But rising interest rates are always good for banks with a strong liability franchise because CASA does not get repriced and deposits reprice with a lag.
For obvious reasons, the 6% being offered currently on one-year deposits by most banks is clearly not sustainable over the longer term given that there are alternative investment avenues. The success of some issuances of corporate debentures indicates that people are willing to take on a little more risk for some more reward and willing to invest for five years with put-and-call options. Companies such as Tata Capital have been able to mop up five year money and L&T Finance, which is offering three year money at an annual coupon of 8.5%, should be able to raise a decent amount.
Any depositor today is earning a negative real rate of return since inflation is way above 6% and the steep cut in deposit rates is the main reason why term deposits are growing at their lowest rate?16% since 2006. That?s way below the peak growth rate of just under 30% seen sometime in early 2008.
shobhana.subramanian@expressindia.com