The gap between weighted average lending rates and fresh lending rates has declined from peak values of 85-95 bps in 3QFY19 to 55 bps.
As per the latest data by RBI, term deposit rates were broadly flat month-on-month (m-o-m) in May 2019 at 6.9% (up 15 bps year-on-year). 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 m-o-m 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 small finance banks (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.
Lending rates are yet to decline
With sticky deposit rates, the translation of repo cuts to loans is still not visible. Fresh lending rates increased 10 bps m-o-m 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 m-o-m increase in fresh lending rates of private banks to 10.6% while it dropped 5 bps m-o-m for PSU banks to 9.3%. Weighted average lending rates were flat m-o-m (up 15 bps y-o-y) 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. 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.
The gap between outstanding and fresh lending rates was down 10 bps mom in May 2019 at 55 bps. The gap has been in the range of 50-70 bps over July 2018-April 2019. Spreads for private banks decreased 20 bps m-o-m to 60 bps in May 2019 while that of PSU banks were flat mom at 65 bps. There is still a meaningful difference between the lending yields and the corporate bond yield rate as the ability for corporates switch to bond market has been quite easy.
NIM compression broadly arrested
The gap between weighted average lending rates and fresh lending rates has declined from peak values of 85-95 bps in 3QFY19 to 55 bps. Increase in fresh lending rates is unlikely from here onwards as most companies focus on higher share of low yielding retail products and lending to better rated corporates. Term deposits rates have broadly stabilised post recording strong increase in 2HFY18. With gradual revival in lending from PSU banks (5 PCA banks have exited PCA framework) and weaker loan growth at 12-14%, private banks will gradually soften growth trends leading to reduction in CD ratio (operate at >90% CD ratio). This will reduce pressure on private banks to borrow at higher rates as passing the benefit was challenging.
Edited extracts from Kotak Institutional Equities Research