Banks may have peaked lending spreads, experts say

Lending rates fell from February levels in March, but the need to raise deposit rates may have caused spreads to the peak. According to the statistics presented by the RBI, India has declined by 16 basis points (bps) over February 2021 by a marginal lending expenditure — an interest rate on new loans, fewer new deposits — for the bank system (RBI).

Meanwhile, spreads for private banks remained high by 4.6% and public sector banks by 3.2% on average (PSBs). The spread of outstanding and new loans between the average lending rates was 120 bps. While headline rates have fallen, spreads between long-duration and short-duration loans and AAA and AA have remained elevated. Therefore, implying that spreads over loans in terms of both products and duration are still relatively high, according to Kotak Institutional Equities (KIE).

Several factors, according to analysts, may have contributed to spreads remaining high despite a lack of credit offtake. These include the proportion of fixed-rate loans in the mix, higher-yielding unsecured loans (also fixed-rate), and pricing designed to offset the impact of increased bad assets.

Banks may have peaked lending spreads, experts say

According to a Nomura note, banks earned higher spreads during the Covid phase because credit disintermediation was low and could price products better. This could be programmed to change. “As long as the cyclical loan demand recovery continues, banks might have to raise their retail deposit rate, even if the wholesale deposit rate has been off its bottom since 21 January. According to the brokerage company, a slower RBI monetary policy move may damage the NIM on the margins, with new loans being priced off the ‘repo rate‘.

Furthermore, the recent decline was mainly due to an average loan rate drop of 90 bps (80 essential points) on a monthly (MoM) month in March for new loans from foreign banks. The average lending rate on new loans fell by only 16 basis points at the system level. Private bank loans rose by 16 basis points on a month-by-month basis.

As a result, rate transmission is much slower than the headline figures suggest. “We acknowledge that spreads have continued to remain high in a relatively low growth and heightened risk environment, especially after Covid,” KIE said, adding that the spread between G-secs and deposits and loan rates has widened. This means that banks are seeing lower spreads on investments and higher spreads on loan yields.

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