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Lending rates likely to soften on cut in repo, MCLRs: Kotak
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SME Times News Bureau | 11 Sep, 2019
Kotak Equities on Wednesday
estimated lending rates to soften following the 35 basis points (bps)
decrease in the RBI repo rate last month and the drop in banks' marginal
cost of lending rates (MCLR).
The Kotak Equities report noted,
however, that fresh lending rates remain broadly unchanged at 9.8 per
cent despite downward revisions to the MCLR.
As per the Reserve
Bank of India's (RBI) release on system-wide lending and deposit rates,
fresh lending rates remain broadly unchanged at 9.8 per cent despite
downward revisions to the MCLR.
Term deposit rates have declined
5 bps to 6.85 per cent, while the gap between outstanding loan and
fresh loan rates was down 10 bps month-on-month (MoM) at 75 bps.
"With
the 35 bps decrease in repo (RBI's short-term lending rate for
commercial banks) rate in August 2019 and drop in MCLR rates, lending
rates are likely to soften. We are likely to shift focus to market
benchmark lending yields from hereon," Kotak said.
The report
said that weighted average term deposit rates have started to decline.
As per RBI data, term deposit rates were down marginally 5 bps MoM in
July 2019 to 6.85 per cent, although up by 15 bps year-on-year (yoy).
Term
deposit rates had seen strong upward movement from November 2017 to
March 2018 by 20 bps to 6.7 per cent but were flat thereafter with a
marginal 15 bps rise until September 2018 to 6. 8 per cent and
additional 10 bps, thereafter.
The report said wholesale deposit
cost has declined sharply by 70 bps in August 2019 taking the total
decline in the current fiscal to 170 bps.
"We have started to
see banks, especially private banks, cutting headline deposit rates in
recent months. The gap between repo and term deposit rates has started
to converge as banks had struggled in recent times to manage their
deposit mobilization activities," Kotak said.
Kotak also noted
that lending rates were broadly unchanged for July 2019 despite downward
reduction to MCLRs. Fresh lending rates increased marginally by 10 bps
MoM in July 2019 to 9.8 per cent after declining 20 bps in June 2019.
While
fresh lending rates of public sector banks (PSBs)increased 10 bps MoM
to 9.3 per cent, private banks' rates were roughly flat MoM. Lending
rates on outstanding loans remained unchanged MoM at 10.4 per cent.
MCLR
rates started to decline for private banks in August 2019 after having
remained stable over the last few months while PSBs have witnessed
sharper declines of 20 bps since May 2019 .
According to Kotak,
lending rates are likely to decline going forward with most banks having
cut MCLR rates by 10-20 bps in the past one month, and with the
introduction of external benchmark-linked loans.
The gap between
outstanding and fresh lending rates was down 10 bps MoM in July 2019 to
65 bps. The gap has been broadly in the range of 50-70 bps since July
2018. The spread for private banks was up 5 bps MoM to 90 bps in July
2019 while that of PSBs was down 5 bps MoM to 65 bps.
The
gradual decline in yields has led to a situation where the spread
between bank funding and bond rates has started to converge.
The broking house also said there is a shift in focus towards external benchmarked instruments.
With
slower growth leading to gradual reduction between deposit and loan
growth, the pressure to keep deposit rates high has reduced. This has
led to lowering of deposit rates while headline lending rates are
softening as well.
"While we retain our neutral to positive view
on NIM (Net Interest Margin) for banks with high share of NPLs from
corporate sector, we would probably need to moderate this outlook if
there is a greater divergence between external benchmark-linked loans
and MCLR, our current basis of forecasts," Kotak said.
"The
external benchmarked products are likely to be introduced in the next
quarter and we need to see their relative pricing as compared to MCLR
which is high today but converging. The impact may be lower for FY2020
as it is prospective in nature but it nevertheless remains an overhang
till we have clarity on the pricing of these loans.
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