Slowing pace of change. According to the latest version from RBI, the rate of decline in loan rates and deposit fees has started to slow. However, the spread between the average rate on outstanding loans and new loans remained around ~ 110bp. The movement in overall yield suggests that spreads are holding, but further expansion seems unlikely. High spreads do not bode well as they always show reluctance to lend, in our opinion.
According to the latest data from RBI, TD rates were flat at ~ 5.6% (down about 100bp year-on-year). TD’s weighted average rates were fixed for private banks and PSUs. Private banks and PSUs have reduced their TD rates by ~ 110 bps and ~ 90 bps respectively over the past twelve months.
TD rates had trended higher from December 2017 to February 2019, increasing by about 40 basis points to 6.9%, after TD rates had been flattening for a few months and started to rise. decrease (down around 120 basis points since June 2019). The cost of wholesale deposits (as measured by CD rates) saw a much sharper decline of ~ 320 basis points in fiscal 2020, followed by a further decline of around 180 basis points over the course of fiscal year 2020. fiscal year 2021.
The weighted average TD rate is broadly similar to the TD rate (term of 1 to 2 years) offered by most banks today; slightly lower than the rates offered by the SFBs. We have started to see banks, especially private banks, cutting TD policy rates over the past few quarters. The spread between the repo rate and the one-year TD rate for SBI remained stable ~ 90bp after declining from peak levels by around 130bp.
Lending rates on new loans declined from around 5 basis points to around 8.3% in November 2020. Fresh lending rates have been constrained in recent months after falling from a high of ~ 10 % observed in January 2019. Private sector banks saw a decline of ~ 10bp mom to ~ 8.9%, while PSU banks posted a decline of around 10bp. The spread between private bank and PSU fresh lending rates is now around the average level of around 100 basis points seen over the past twelve months.
Loan rates on outstanding loans edged down to ~ 9.4% in November 2020, after declining around 80bp since November 2019. Banks have cut their MCLR rates in recent months. Private banks and PSU banks have reduced their MCLRs by around 90 to 100 basis points over the past 12 months.
The spread between current and fresh lending rates has been in the range of 110-140bp over the past nine months. The spread had widened before that, driven by a steadily declining lending fee rate. The sharp drop in bond market rates until July 2020 led to a narrowing of the spread between bank financing and bond rates.
If overall lending rates have come down when we look at policy rates, the transmission is probably slower when we look at various products or risk segments.
In an environment of relatively low growth and increased risk, especially after Covid, we see that spreads have remained high. The spread on G-Sec with deposits and lending rates has widened, which means banks are seeing smaller spreads on investments and better spreads on loan returns. While we are seeing positive trends in loan demand recovery, we still believe there is still time before this is reflected in loan growth.