Spread between Lending & Deposit Rates Nears Pre-Covid Levels in February
Synopsis
* In February 2023, the increase in lending as well as deposit rates continued unabated.
* The weighted average lending rate (WALR) on fresh rupee loans of scheduled commercial banks (SCBs) increased by 24 basis points (bps) from 9% in January 2023 to 9.24% in February 2023. Meanwhile, the WALR on outstanding rupee loans of SCBs increased by 9 bps from 9.58% in January 2023 to 9.67% in February 2023.
* The weighted average domestic term deposit rate (WADTDR) on outstanding rupee term deposits of SCBs increased by 12 bps from 5.90% in January 2023 to 6.02% in February 2023.
* 1-Year median Marginal Cost of Fund based Lending Rate (MCLR) of SCBs increased from 8.45% in February 2023 to 8.55% in March 2023.
* The share of External Benchmark based Lending Rate (EBLR) linked loans in total outstanding floating rate rupee loans of SCBs stood at 47.6% at end-September 2022, while share of MCLR-linked loans was 46.5%.
* Private Sector Banks (PVB) and Public Sector Banks (PSB) have maintained high spreads between lending and deposit rates, with PVBs seeing higher spreads, as banks raised rates amid RBI’s tightening moves. Rate hikes and subsequent faster resets in lending rates vs. deposit rates have led to NIM expansion in the near term however, the widening gap between credit and deposit growth amidst tightening liquidity is leading to aggressive pricing of deposits which is expected to impact the NIMs going forward
* Credit demand has been recording double-digit growth driven by personal loans, increased working capital requirements, and NBFCs. Meanwhile, comparatively lower deposit mobilisation and pick-up in credit offtake have pushed the credit deposit ratio to nearly 75.4% as of March 10, 2023.
* The banking system liquidity surplus has narrowed from Rs 6.3 lakh crore at the start of FY23. Liquidity tightened on strong credit demand, advance tax outflows and LTRO and TLTRO redemptions. These tightening liquidity conditions have pushed the short-term interest rates higher. The short-term Weighted Average Call Rate (WACR) has reached 6.42% (as of March 10, 2023) from 3.29% as of March 18, 2022, due to a rise in policy rates and lower liquidity in the system.
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