Lending rates likely to soften after repo rate, MCLR cuts

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Published: September 13, 2019 2:06:12 AM

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.

Kotak Institutional Equities, Lending rates, MCLR, MCLR cuts, deposit rates, market newsFresh lending rates increased marginally by 10 bps m-o-m in July 2019 to 9.8% after declining ~20 bps in June 2019.

Lending rates hold: As per RBI’s release on system-wide lending and deposit rates, fresh lending rates remain broadly unchanged at 9.8% despite downward revisions to MCLR. Term deposit rates have declined ~5 bps to 6.85%. Gap between outstanding loan and fresh loan rates was down ~10 bps m-o-m at ~75 bps. With the 35 bps decrease in repo rate in August 2019 and drop in MCLR rates, lending rates are likely to soften. We are likely to shift focus to market benchmark lending yields from hereon.

Weighted average term deposit rates have started to decline: 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 sharply by ~70 bps in August 2019 taking the total decline in FY2020 to ~170 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 SFBs. We have started to see banks, especially private banks, cutting headline deposit rates in recent months.

Lending rates broadly unchanged for July 2019 despite downward reduction to MCLR: Fresh lending rates increased marginally by 10 bps m-o-m in July 2019 to 9.8% after declining ~20 bps in June 2019. Fresh lending rates of public sector banks increased 10 bps m-o-m to 9.3%, private banks’ rates were roughly flat m-o-m. Lending rates on outstanding loans remained unchanged m-o-m (up 20 bps y-o-y) at 10.4%. MCLR rates started to decline for private banks in August 2019 after having remained stable over the last few months while PSU banks have witnessed sharper declines of ~20 bps since May 2019.

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