Banks' lending rates are on a downward spiral, first with consumption-led slowdown and now due to coronavirus-induced inactivity. As per the recently released RBI data, lending rates of scheduled commercial banks on fresh rupee loans touched 66-month low of 9.26 per cent in February 2020.
Lending rates have been constantly declining since August last year on a monthly basis. Fresh loans witnessed a skimpy rise of 7 basis points (bps) in January, but resumed the downward trend in February with a month-on-month (m-o-m) decline of nearly 10 basis points. In fact, fresh lending rates are on a decline since January 2019. It gradually reduced from 9.97 per cent to 9.26 now. However, four months saw a rise in lending rates, on a m-o-m basis, during this period.
Earlier this month, the central bank had announced a massive 75 bps cut in repo rate coupled with 100 bps reduction in cash reserve ratio to mitigate the impact of coronavirus pandemic on the economy. The reverse repo rate too was slashed by 90 bps to reduce financial stress on banks and encourage them to lend more to businesses. The RBI has reduced the repo rate five times since the beginning of 2019.
The deposits rates on outstanding rupee term deposits were flat at around 6.5 per cent, during the month of February.
With the 210 bps decrease in repo rate since January 2019, lending rates are likely to soften. "For repo-linked loans, we believe the spread between the repo and deposit rates will drive NIM outlook, which at this time is still quite high, given the sharp reduction in the repo rate from the last policy meeting," a Kotak Institutional Equities report said.
Public sector banks witnessed a noteworthy m-o-m decline of around 20 bps while private sector banks' fresh lending rates increased by nearly 10 bps to 8.6 per cent and 10.3 per cent, respectively in February. According to the report, currently the gap between fresh lending rates of private banks and public sector banks is approximately at 1.6 per cent - a level not seen in the past five years.
Lending rates on outstanding loans were flat m-o-m at 10.1 per cent in February 2020, having declined nearly 20 bps since August 2019. "Banks have started cutting MCLR rates in recent months. Both private and public sector banks have cut rates by nearly 50-60 bps over past 12 months. Lending rates are likely to see further declines going forward, on account of continued MCLR cuts," the report added further.