Signalling a decisive reversal in the rate cycle, interest rates on fresh loans have stabilised in recent months. This is a departure from much of 2016 and the first half of 2017, when they were on a downward spiral. Data released by the Reserve Bank of India (RBI) shows the weighted average lending rate (WALR) on fresh loans in the banking system has fallen only about 7 basis points (bps) between June 2017 and January 2018, as opposed to a 50-bps fall during the corresponding period a year ago. Lending rates at public-sector banks (PSBs) fell by a mere 2 bps over the seven-month period, while the fall at private banks — at 13 bps — was higher than the average. Rates at foreign banks actually hardened during the period under review by 16 bps. Analysts point out the data confirms recent trends of increase in rates on commercial paper (CP) and certificates of deposit (CDs) by 90 bps and 30 bps, respectively, over the last three months. It also corroborates the hikes in retail term deposit rates and the more recent hikes in marginal cost of funds-based lending rates (MCLRs) by banks.
Another factor at play has been the drying up of liquidity in the system in the December quarter. An improvement in loan growth, which moved into double-digit territory in November, has also given some elbow room to banks to raise rates. These are all factors conducive to an expansion in banks’ margins, according to Kotak Institutional Equities (KIE). In a recent note, the brokerage wrote. “Rising interest rates coupled with improving loan growth is an ideal scenario for banks from a NIM (net interest margin) point of view.”
It added: “We appear to be heading in this direction as rates have started to firm, along with improving growth trends. While we have seen fresh lending rate move up marginally, average lending rates are still nearly 80 bps above the fresh lending rates.” For margins to be preserved, this gap will have to narrow, KIE observed, as the portfolio is still witnessing pressure on the downward pressure even as the cost of funds has already started to increase.
Banks are relying more on loan growth than rate hikes to expand margins. After State Bank of India (SBI) hiked rates on some term deposits earlier this week, Anshula Kant, deputy managing director and chief financial officer at the bank, told FE that loan rates are unlikely to rise much from current levels. “We are seeing a pick-up in credit growth and that will aid expansion in margins from here on,” she observed.”