Reserve Bank of India’s data for system-wide average lending and deposit rates for June continued to indicate a flattish trend for the sector (slack period), the outcomes similar for private and public banks.
Reserve Bank of India’s (RBI) data for system-wide average lending and deposit rates for June continued to indicate a flattish trend for the sector (slack period), the outcomes similar for private and public banks. Deposit rates, which saw consistent increase for private banks, were stable in June 2018. The gap between outstanding weighted average lending rate (WALR) and fresh loans has started to shrink but is still negative. Net interest margin (NIM) pressure will persist in the medium term.
Cost of funds
Latest data by RBI (as of June 2018) suggests flat trends in term deposit rates over the past few months for the sector. Term deposit rates across banks, which had increased to 6.7% in March 2018 (up 20 bps since November 2017), have remained stable thereafter. However, the key difference is the trend for private banks, which had seen consistent increase for the past six months but softened, albeit marginally by 5 bps, in June 2018. Wholesale deposit cost (as measured by CD rates) has also shown a similar trend.
MCLR continues to rise in Q1FY19
Fresh lending for banks saw a marginal improvement of 5 bps in June. The improvement is not too meaningful to turn positive on NIM outlook as there is higher focus of banks to lend towards low-yielding segments, which are closer to MCLR. Increase in focus on retail credit could be a driving factor for flat trends in fresh lending rates over March-June 2018. MCLR (8.5% as of June 2018), however, continues to rise, up 25 bps since December 2017 and 15 bps since March 2018. With deposit rates broadly stable, further rise in MCLR at a swift pace, is less likely.
Gap between outstanding lending rates and fresh loans declines
There is significant gap between fresh lending rates and weighted average lending rates, even as funding costs have started to rise. There has, however, been some improvement over April-June 2018, resulting in decline in the spread between them. However, the challenge is to see an upward movement in lending rates to prevent NIM compression, which did not happen this quarter for the system. The gap for the sector declined to 65 bps in June 2018 from 80 bps in March 2018. PSU banks saw a drop in spread to 70 bps in June 2018 from 95 bps in March 2018 and the spread deteriorated <5 bps month-on-month to 65 bps for private banks over the same period. We see that the overall yields have improved suggesting upward re-pricing of the back book.
NIM pressure to persist in short term for private banks
While the difference between weighted average and fresh lending has declined, the overall trend should have an upward momentum to arrest NIM pressure, which is yet to happen. Recent results from the private banks broadly reiterate the above hypothesis. We are in a relatively unique situation where lending is quite concentrated with a few banks while deposit accretion continues to happen in all banks. Consequently, CD ratio for public banks, especially those under PCA framework, remains low while it stays very high for the private banks. This is pushing these private banks to increase rates to borrow funds while passing them has not been easier but directionally it is improving.
Edited extracts from Kotak
Institutional Equities Research