Fresh lending rates for banks were flat MoM in September 2018 despite a rise in MCLR rates, though the trend was different for PSU and private banks.
Reserve Bank of India’s data for system-wide average lending and deposit rates for September showed a marginal upward movement in lending yields; a direct result of MCLR rate hikes over the last 4-5 months. The outcome was more visible for PSU bank which saw a spike in fresh loan rates compared to private ones which saw a similar trend in July 2018.
The gap between outstanding loan and fresh loan rates remained high at 70 bps; albeit a marginal drop MoM. Term deposit rates have been broadly flat over the last few months and will likely reflect an upward trend going ahead. As such, NIM pressure is likely to sustain in near-term.
Term deposit rates maintain flat
As per the latest data by RBI, term deposit rates were flat in September 2018; a trend observed over the last six months. 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 12 bps rise until September 2018 to 6.8%. Wholesale deposit cost (as measured by CD rates) has also shown a similar trend. Average term deposit rates are broadly similar to term deposit rates (1-2 years) offered by most banks today, thereby indicating a stable deposit rate trend over the near term, though skew in CD ratio might push some private banks to raise deposit rates during the high growth festive season when loan growth will be higher. ICICI Bank has recently raised TD rates by 25 bps in the 2-3 year bucket.
Fresh loans see improvement
Fresh lending rates for banks were flat MoM in September 2018 despite a rise in MCLR rates, though the trend was different for PSU and private banks. PSU banks saw 15 bps rise in weighted average lending rates MoM on fresh loans to 9.5% whereas it was flat MoM for private banks.
MCLR rates (8.8% as of October 2018), continue to rise, up 25 bps since June 2018 and 35 bps since March 2018. MCLR rates were however flat MoM in October 2018 for PSU and private banks at 8.7% and 9.3% respectively. With deposit rates broadly stable, a swift rise in MCLR rates is less likely.
There is a significant gap between fresh lending rates and weighted average lending rates, even as funding costs have started to rise. The gap has been in the range of 70 bps over July-September 2018. PSU banks saw a steep drop in spreads to 60 bps in September 2018 (down 25 bps MoM) while spreads were flat at 85 bps MoM for private banks. We do see that overall yields have improved, suggesting the upward re-pricing of the back book due to increase in MCLR rates.
NIM pressure likely to ease
The decrease in the gap between fresh lending rates and weighted average lending rates suggests an environment of easing pricing pressure. The data from October should see further improvement. While it would take some time to reflect on the overall lending yields given the nature of the loan book, it would be quite surprising to see NIM pressure for banks with a strong liability franchise.
-Edited extracts from Kotak Institutional Equities Research report