In April 2024, the banking sector witnessed significant pressure on outstanding (o/s) spreads due to growing competition among banks and a slowdown in unsecured lending growth.
Public sector banks (PSBs) experienced a new 10-year low in o/s spreads, reaching 2.25%, while private sector banks (PVBs) maintained a higher spread compared to PSBs, according to a CareEdge report.
Since June 2023, the spreads between the outstanding lending rate and the deposit rate have been hovering below pre-pandemic levels, exerting pressure on Net Interest Margins (NIMs). The gap between outstanding lending and deposit rates has narrowed compared to the spread between fresh lending and deposit rates.
Additionally, the Reserve Bank of India’s (RBI) increased scrutiny on unsecured lending products has led to banks’ exposure to high-yield products, such as unsecured personal loans, remaining high but at a reduced rate. This has caused lending rates to experience some pressure. Furthermore, with yields on capital market offerings remaining elevated, interest rates on deposits are likely to increase. The Credit to Deposit ratio remains elevated, making the growth in the liability franchise crucial for sustaining loan growth.
Falling spreads
In April 2024, scheduled commercial banks (SCBs) saw the spread between the o/s weighted average lending rate (WALR) and the weighted average domestic term deposit rate (WADTDR) decrease by 5 basis points (bps) month-on-month (m-o-m) to 2.90%. The lending rate on o/s rupee loans of SCBs decreased by 2 bps sequentially to 9.81%, while the deposit rate on o/s rupee term deposits increased by 3 bps to 6.91%. Meanwhile, the one-year median Marginal Cost of Funds-based Lending Rate (MCLR) of SCBs decreased by 6 bps m-o-m to 8.79% as of May 2024.
Conversely, the spread between fresh lending and deposit rates for SCBs widened sequentially by 32 bps to 3.07%. The lending rate on fresh rupee loans of SCBs increased by 18 bps sequentially to 9.55% in April 2024, while the fresh deposit rate of SCBs decreased by 14 bps to 6.48% in the same period.
Credit offtake has continued to grow, increasing by 19.5% year-on-year (y-o-y) to Rs. 166.1 lakh crore for the fortnight ended May 17, 2024. Deposits also grew by 13.3% y-o-y, reaching Rs. 208.1 lakh crore as of May 17, 2024, driven by growth in time deposits.
