Banks’ Spreads Hit 9-year Low, Will Impact NIM: CareEdge Ratings
The outstanding Scheduled Commercial Banks (SCBs) spread, which has been compressing over the last year, reached a 9-year low in November 2023, according to a report by CareEdge Ratings.
The spreads were squeezed as lending rates either stagnated or fell, while deposit rates saw a marginal increase which is expected to continue exerting pressure on banks’ Net Interest Margins (NIMs).
The spread of SCBs between the weighted average lending rate and weighted average domestic term deposit rate stood at 3.00 per cent and 2.99 per cent for fresh and outstanding rates, respectively in November 2023.
The weighted average lending rate on outstanding rupee loans of scheduled commercial banks (SCBs) dropped by 4 basis points (bps) sequentially to 9.78 per cent, while the weighted average domestic term deposit rate on outstanding rupee term deposits increased by 3 bps to 6.79 per cent in November 2023.
Meanwhile, the one-year median Marginal Cost of fund-based Lending Rate (MCLR) of SCBs increased by 5 bps month on month (MoM) and reached 8.75 per cent in December 2023, the report mentioned.
The weighted average lending rate on fresh rupee loans of SCBs dropped sequentially by 16 bps to 9.34 per cent in November 2023, while the weighted average domestic term deposit rate (Fresh) of SCBs increased by 3 bps to 6.31 per cent in November 2023, the CareEdge report highlighted.
In November 2023, there was a broad compression in lending rates, in contrast, interest rates on deposit rates increased, Spreads between the outstanding weighted average lending rate and weighted average domestic term deposit rate have fallen below pre-pandemic levels since June 2023, which is exerting pressure on NIMs.
Notably, the spread between the outstanding lending and deposit rates has narrowed compared to that between the fresh lending and deposit rates.
Furthermore, with the Reserve Bank of India (RBI) turning the heat on unsecured lending products leading to banks turning cautious on highyield products such as unsecured personal loans, lending rates could also witness some pressure.
Further, with yields on capital market offerings remaining elevated, the interest rates on deposits are likely to increase in the current period. Additionally, as the credit-to-deposit ratio remains elevated, growth in the liability franchise would play a significant role in sustaining loan growth.
The competition for deposits is likely to remain intense resulting in a rise in funding costs in the coming periods as current account and savings account (CASA) share reduces further, the report emphasised.
