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Overview

* In September 2023, outstanding deposit rates increased while outstanding lending rates weakened marginally. Meanwhile, rates on fresh business broadly declined

* The spread of SCBs between WALR and WADTDR (the net interest rate spread) stood at 3.06% and 3.1% for Fresh and Outstanding rates, respectively in September 2023. The o/s SCB spread have been compressing over the last year and has reached a new 9-year low. PVBs continue to maintain a higher spread as compared to PSBs.

* The weighted average lending rate (WALR) on outstanding rupee loans of scheduled commercial banks (SCBs) declined marginally sequentially, however, the weighted average domestic term deposit rate (WADTDR) on o/s rupee term deposits increased by 9 bps from 6.60% in August 2023 to 6.69% in September 2023. Meanwhile, if the merger effect is excluded, similar results would be reported, with lending rates declining by 1bps and deposit rates rising by 10 bps.

* One-year median Marginal Cost of fund-based Lending Rate (MCLR) of SCBs stood at a similar level of 8.70% in October 2023 from September 2023.

* The WALR on fresh rupee loans of SCBs dipped sequentially by 9 basis points (bps) to 9.38% in September 2023 from 9.47% in August 2023, while on WADTDR (Fresh) SCBs fell by 4 bps from 6.36% in August 2023 to 6.32% in September 2023.

Large Gap Between Credit and Deposit Growth Persists along with Lower Liquidity Levels

Fig 1: Growth in Credit Continues to Outpace Deposit

Fig 2: Bank System Liquidity (Net Liquidity Injected in Rs lakh crores)

Credit offtake increased by 19.3% year on year (y-o-y) as of October 06, 2023. It is important to note that the yo-y figures are not directly comparable, as the data includes the impact of the merger of HDFC with HDFC Bank. In absolute terms, over the last twelve months, credit offtake expanded by close to Rs. 25 lakh crore to reach Rs 151.5 lakh crore as of October 06, 2023. Excluding the impact of the merger, the growth stood at 14.7% y-o-y. This growth was primarily driven by continued demand for personal loans. Deposits rose to 13.5% y-o-y and without considering the merger, deposits rose by 12.7% y-o-y. Meanwhile, in absolute terms, deposits expanded by Rs. 22.3 lakh crore and reached Rs. 196.1 lakh crore as of October 06, 2023, compared to October 07, 2022. According to CareEdge Economics in The Economic Pathway, liquidity conditions remained tight over the last month, with some pressure easing as the last phase of I-CRR reversal took place on October 7. Given that threat of inflationary risks continues to linger, RBI is expected to ensure enough liquidity to meet credit demand.

Spread Compression on O/s Business of SCBs and PSBs Persists and Touches a 9-year Low

Figure 3: Evolution of Spreads (O/s)

Figure 4: Evolution of Spreads (Fresh)

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