Banks have started hiking loan rates because the cost of borrowings has been rising even as the pace of growth of deposit has been slowing.
Money is becoming costlier even before the central bank meets to review policy this week. Banks have started hiking loan rates because the cost of borrowings has been rising even as the pace of growth of deposit has been slowing.
State Bank of India (SBI), ICICI Bank, Punjab National Bank (PNB) and Housing Development Finance Corporation (HDFC) raised loan rates over the last two days amid hardening yields and increased pricing pressure for non-banking financial companies (NBFCs).
NBFCs have taken away some of banks’ market share in recent years but now the banks are more confident that they can compete.
While SBI raised its one-year marginal cost of funds-based lending rate (MCLR) by five basis points (bps) to 8.5%, ICICI Bank hiked the rate by 10 bps to 8.65%. PNB left the one-year rate unchanged at 8.45% while raising rates on overnight, one-month and three-year borrowings by 5-20 bps. HDFC increased its retail prime lending rate (RPLR), on which its adjustable-rate home loans are benchmarked, by 10 bps.
The continuing rate hikes by banks indicate that they may have regained some of their pricing power as hardening yields weigh on NBFCs’ margins, forcing them to raise lending rates.
Karthik Srinivasan, senior vice-president, Icra, said NBFCs’ lending rates for loans to consumers and small businesses have risen by 25-50 bps over the last couple of months. “NBFC loans have turned dearer, but banks are still some distance away from regaining market share from these companies. Their capital constraints will not allow that to happen easily,” he said.
In a recent report, investment bank Nomura wrote that the yield for AAA corporates has moved up by 25-30 bps in the past three months. On a relative basis, the cost of retail term deposits for banks has risen only by 10 bps in the past three months. “HFCs (housing finance companies) are more sensitive to the rise in wholesale cost of funds driven by higher share of bonds/CPs (commercial papers) in their funding mix and higher sensitivity of higher cost of funds to their profitability, given lower spreads in the business,” Nomura said, adding, “We have been cautious on incremental mortgage spreads since January 2017 and our recent upgrades of HFCs were driven by valuations.”
Analysts believe that tighter spreads may continue to plague NBFCs in the months ahead and eventually impact consumption. “NBFCs have been a much higher percentage of system credit growth over the last few years. So, a slowdown will hurt macro growth and specifically consumption,” UBS Securities India said in a recent note.