Analyst corner: Translation of repo cuts to loans still not visible

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Published: July 20, 2019 1:42:48 AM

Some banks have decreased MCLR rates by 5-15 bps in March-May 2019. With deposit rates stable, a swift rise in MCLR rates is less likely

Deposit rates have remained stable in recent times as banks have found it challenging to pass through rate cuts given their tight liquidity conditions.

As per RBI’s release on system-wide lending and deposit rates, fresh lending rates increased 10 bps mom in May 2019 to 9.9% led by a 20 bps increase for private banks. Term deposits have stabilised around 6.9%. Gap between outstanding loan and fresh loan rates was down 10 bps mom at 55 bps. With decrease in repo rate by 25 bps in April/May 2019 and drop in MCLR rates by some banks in June/July 2019, lending rates are yet to soften to reflect translation of repo to lending yields.

As per the latest RBI data, term deposit rates were broadly flat mom in May 2019 at 6.9% (up 15 bps y-o-y). 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 over 3QFY19.

Wholesale deposit cost (as measured by CD rates) was flat mom in July 2019 after declining by 45bps in 1QFY20. 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 SFBs. Deposit rates have remained stable in recent times as banks have found it challenging to pass through rate cuts given their tight liquidity conditions.

With sticky deposit rates, the translation of repo cuts to loans is still not visible. Fresh lending rates increased 10 bps mom in May 2019 to 9.9%, suggesting there is still pricing power with banks as loan mix appears to be unchanged.

This was driven by 20 bps mom increase in fresh lending rates of private banks to 10.6% while it dropped 5 bps mom for PSU banks to 9.3%. Weighted average lending rates were flat mom (up 15 bps yoy) at 10.4%; broadly flat over the past nine months. Increase in MCLR rates slowed down in 4QFY19 post robust increase during May-September 2018 (Exhibits 4 and 5).

Some banks have decreased MCLR rates by 5-15 bps in March-May 2019. With deposit rates stable, a swift rise in MCLR rates is less likely. Additionally, focus will shift on rate of translation of decline in repo rates to lending yields.

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