The gap between outstanding and fresh lending rates was up 10 bps m-o-m in August 2019 to 75 bps. The gap has been broadly in the range of 50-70 bps since July 2018.
As per Reserve Bank of India (RBI’s) latest release, fresh lending rates declined marginally to 9.7%. Term deposit rates have been flat month-on-month (m-o-m) at 6.85%. The gap between outstanding loan and fresh loan rates was up 10 basis points (bps) m-o-m at 75 bps. With a 35 bps decrease in repo rate in August 2019 and drop in MCLR rates, lending rates are likely to soften. Repo-linked loans are still in their early days and we believe that the spread between repo and deposit rates will likely act a key driver for NIM outlook.
Weighted average term deposit rates
As per the latest data by RBI, term deposit rates were flat MoM in August 2019 at ~6.85% (up ~10 bps yoy). Term deposit rates had seen strong upward movement from November 2017 to March 2018 by 20 bps to 6.7% but were flat thereafter with a marginal 15 bps rise until September 2018 to 6.8% and additional 10 bps thereafter. Wholesale deposit cost (as measured by CD rates) has declined by 70 bps in 2QFY20 taking the total decline in FY2020 to 185 bps.
Average term deposit rates are broadly similar to term deposit rates (1-2 years) offered by most banks today; slightly lower than rates offered by small finance banks (SFBs). We have started to see banks, especially private banks, cutting headline deposit rates in recent months. The gap between repo and term deposit rates has started to converge even as banks had struggled in recent times to manage their deposit mobilisation activities.
Fresh lending rates soften, albeit marginally
Fresh lending rates declined marginally by 10 bps m-o-m in August 2019 to 9.7% and have been broadly unchanged since June 2019. Fresh lending rates of public sector banks declined 10 bps m-o-m to 9.2% while private bank rates were down 15 bps m-o-m to 10.2%. Lending rates on outstanding loans were up 10 bps y-o-y at 10.5%. MCLR rates started to decline for private banks over the past two months while PSU banks have witnessed sharper declines of ~20 bps since May 2019. Lending rates are likely to see declines with most banks cutting MCLR rates by 10-20 bps in the past month and with the introduction of external-benchmark-linked loans.
Gap between outstanding lending rates & fresh loans
The gap between outstanding and fresh lending rates was up 10 bps m-o-m in August 2019 to 75 bps. The gap has been broadly in the range of 50-70 bps since July 2018. The spread for private banks was up 15 bps m-o-m to 100 bps in August 2019 while that of PSU banks was up 10 bps m-o-m to 75 bps. The gradual decline in yields has led to a situation where the spread between bank funding and bond rates has gradually started to converge.
NIM could see some pressure
At this point, a bulk of the loan portfolio is still benchmarked to MCLR. However, we are likely to start seeing the impact of repo-linked rate loans in a few quarters for banks. We believe that the spread between repo and term deposit rates or the spread between repo and G-Sec rate to be a better indicator of the underlying progress of NIM for banks. We expect a 50 bps rate hike for the rest of FY2019-20, nevertheless, we still see an unchanged interest rate scenario on the 10 year G-Sec bond given the current fiscal situation. We would watch closely if this exerts pressure on NIMs as banks may take less-than-required cuts in deposit rates. Also, we would need to see if there is going to be further revision in spread calculation given that this is a new rate regime.
Edited extracts from Kotak Institutional Equities Research report