Banks May Face Pressure In NIMs As Lending Rates Drop But Deposits Rise

The key factor that will influence your loan EMIs and deposit interest rates is the revision in RBI's policy repo rate. This is because scheduled commercial banks have linked their lending and deposits with external benchmarks such as repo rates! RBI is once again in the limelight for its key rates decision which will be announced on Thursday for the August 2023 policy. Ahead of the policy, let's have a look at how your interest rates on lending and deposits have performed, and what will be their impacts be on the banking sector.

The latest data of June 2023 reveals that lending rates have dropped while deposits have increased despite RBI maintaining a status quo for the second time in a row to 6.5% during this month.

Data from RBI showed that the weighted average lending rate (WALR) on fresh rupee loans of SCBs decreased by 7 basis points (bps) from 9.27% in May 2023 to 9.20% in June 2023. However, WALR on outstanding rupee loans of SCBs has jumped 4 bps to 9.82% in June on a month-on-month basis.

Similarly, the 1-year median Marginal Cost of fund-based Lending Rate (MCLR) of SCBs decreased from 8.65% in June 2023 to 8.63% in July 2023.

In the case of deposits, the weighted average domestic term deposit rate (WADTDR) on fresh rupee term deposits of SCBs increased by 2 bps from 6.32% in May 2023 to 6.34% in June 2023. Also, WADTDR on outstanding rupee term deposits of SCBs increased by 10 bps from 6.37% in May 2023 to 6.47% in June 2023.

According to CareEdge's report, PVBs & PSBs both saw a divergence in fresh lending and deposit rates, wherein PVBs saw an increase in lending rates and a decline in deposit rates, however, an opposite trend was observed for PSBs.

CareEdge's note explained that the spread of SCBs between WALR and WADTDR (the net interest rate spread) stood at 3.35% and 2.86% for Outstanding and Fresh rates, respectively in June 2023. The spread broadly narrowed in June 2023 compared to June 2022 by 44bps as fresh lending rates dropped along with fresh deposit rates, while sequentially o/s deposit
rates rose faster than o/s lending rates.

On a y-o-y basis, the rating agency highlighted that PSB and PVB spread narrowed. In June 2023, finally, the spreads of both PSB and PVBs have fallen below the pre-pandemic levels. Additionally, the spread between Fresh WALR and WADTDR continues to be lower than the spread between Outstanding WALR and WADTDR. PVBs continue to maintain a higher spread given that they charge more as compared to PSBs.

In conclusion, CareEdge's note said, "In June 2023, fresh lending rose, while fresh deposit rates fell. On the other hand, interest rates on outstanding businesses continued to climb. The trajectory of rates on the deposit side will be shaped by the pace of credit offtake, hence we would need to observe the rates movement over the coming months. In June 23, the spreads between o/s WALR and WADTDR have fallen below pre-pandemic levels. Earlier rate hikes and subsequent resets in lending rates vs. deposit rates have led to NIM expansion in the near term which was expected to be followed by NIMs staying stable with deposit rates climbing faster as lending rates stayed stable."

Further, the e withdrawal of Rs 2,000 banknotes has boosted short-term liquidity in the banking sector thereby reducing the pressure on deposit rates.

Hence, CareEdge said, in the later part of FY24, banks are likely to face pressure on NIMs.