Even with a pause by the Monetary Policy Committee, banks have continued to raise rates on their existing loan portfolios, evident from the transmission of rate hikes from the previous quarter.
“Despite a pause by the MPC, banks have continued to raise rates on their outstanding portfolio, as we can still see rate transmission from the previous quarter’s rate hikes,” said a CareEdge report.
In August 2023, outstanding deposit rates increased while outstanding lending rates remained flat. Meanwhile, rates on fresh business climbed, it said.
One indicator of the increasing cost of borrowing is the one-year median Marginal Cost of fund-based Lending Rate (MCLR) of SCBs. In one month, this rate has surged from 8.60% in August 2023 to 8.70% in September 2023
The weighted average lending rate (WALR) on outstanding rupee loans of scheduled commercial banks (SCBs) remained relatively steady in a sequential comparison. However, the situation differs when examining the weighted average domestic term deposit rate (WADTDR) on outstanding rupee term deposits. The data reveals a 5-basis point (bps) increase, rising from 6.55% in July 2023 to 6.60% in August 2023.
On the other hand, WALR on fresh rupee loans of SCBs climbed sequentially by 3 basis points (bps), reaching 9.47% in August 2023 from 9.44% in July 2023. Similarly, the WADTDR (Fresh) of SCBs saw a marginal rise of 1 bps, rising from 6.35% in July 2023 to 6.36% in August 2023. These fresh loan rate increases reflect a challenging environment for borrowers.
NIM compression
The spread of SCBs between WALR and WADTDR (the net interest rate spread) stood at 3.11% and 3.22% for Fresh and Outstanding rates, respectively in August 2023. Private banks continue to maintain a higher spread as compared to PSBs.
Although banks witnessed peak margins in FY23, there is an anticipation of NIM compression in the current fiscal year, primarily driven by the increase in deposit rate.
The banking system’s liquidity remained in deficit due to factors such as RBI’s foreign exchange intervention, robust credit demand, and tax outflows. However, the infusion of liquidity from healthy government spending and the redemption of government securities in the forthcoming months may contribute to achieving a balanced liquidity position.
