Those who heaved a sigh of relief when the Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 6 per cent on Wednesday are, unfortunately, missing the big picture. The truth is that banks have already started raising interest rates on loans, as risks such as surging bond yields and more provisioning requirements erode their profits.
HDFC Bank, India's second largest bank by assets, is the latest to do so. It raised its benchmark marginal cost of funds based lending rate (MCLR) by 10 basis points on the same day that MPC announced its vote. HDFC Bank deputy managing director Paresh Sukthankar had indicated as much last month after declaring Q3 results. "Given, in particular, liquidity conditions and the fact that even at the system level loan growth for the first time now is outpacing deposit growth quite sharply, I think if anything, either rates will be in for a bit of a pause or if these liquidity conditions remain the way they are, there could be some upward pressure on both the deposit and lending rates," he had said.
Previously, Axis Bank, Kotak Mahindra Bank, IndusInd Bank and Yes Bank have all hiked their MCLR by 5 to 10 basis points. MCLR is the minimum interest rate of a bank below which it typically cannot lend. So it seems only a matter of time before other banks follow suit, raising concerns of de facto rate increases in an economy that is growing at its slowest pace in three years and needs private investment. "Lending rates will move up. We cannot avoid that from happening," said the chief of a large state-run bank.
Also, as a report in The Economic Times noted, the Reserve Bank's move to link the base rate with MCLR from April 1 comes as interest rates appear poised to rise after a near-four-year easing cycle. This means that borrowers are likely looking at more expensive home and car loans in the months ahead, perhaps even as early as March.
Lending credence to this line of thought is the fact that lenders have already started raising their bulk deposit rates, and this is typically followed by an uptick in lending rates. SBI has already hiked up the rate on one-year deposits of over Rs 1 crore to 6.25%. PNB followed suit by raising its interest rates steeply by up to 1.35% on bulk deposits of various tenures. According to a recent report by rating agency Icra, with banks' credit outpacing deposits in the last few months, pushing up the credit-deposit ratio, lenders are likely raise deposit rates in the near term. For the record, incremental credit in the current financial year (till 5 January) stood at Rs. 2.02 lakh crore compared to additional deposits of Rs. 1.27 lakh crore.
While banks have an option of reducing their excess statutory liquidity ratio (SLR) holdings and deploying the same towards incremental credit, they may prefer not to do so, as it may trigger an upward movement in bond yields and add to their treasury losses. "Therefore, we anticipate an imminent increase in competition for deposit mobilisation and an upward movement in deposit rates," said the report.
Another major threat to banks is that rising inflation has hurt bonds, driving benchmark 10-year yields up more than 100 bps since July. Worse still, some analysts are predicting that the yield will be higher within six months. This is a big concern for banks because they are the biggest buyers of the debt. Banks are also facing a higher cost of funds, a key expense for the lenders, and more stringent regulatory requirements for their liquidity coverage ratios, points out Ashish Parthasarthy, treasurer at HDFC Bank.
In a measure of how much margins are being hit, the spread between the 10-year bond yield and the median one-year MCLR has narrowed to only 80 bps from 200 bps in July. "Lending rates might go up with such a large increase in bond yields," said Soumya Kanti Ghosh, chief economist at State Bank of India.
The bottomline is that if you are planning to take a bank loan, you'd better not wait.
With agency inputs