The Monetary Policy Committee, now in session, will be deliberating at length on the extent to which the recent hikes in repo rates have been passed on by banks to borrowers and depositors.
Recent quarterly statistics put out by the Reserve Bank of India show that transmission of lending rates has been stronger than deposit rates.
Interestingly, private sector banks have been slower in hiking lending rates on new loans compared with public sector banks and foreign banks.
“We had the leeway to absorb some of the costs as our yields are at least 100 bps higher than most PSU banks because of the advantage in our operational cost. That helped us absorb the repo hikes and not pass it on fully to borrowers,” said the retail head of a private bank.
While the repo rate has been raised by 250 basis points from 4 per cent in May 2022 to 6.5 per cent in February 2023, the increase in lending rates (weighted average lending rates, or WALR) of all scheduled commercial banks on outstanding loans since last May has been only 95 basis points.
The increase in rates of fresh rupee loans is, however, higher at 173 basis points.
Banks have, however, been quite tardy in rewarding savers, with just 99 basis points increase in overall deposit rates (weighted average domestic term deposit rates).
Private lenders go slow
Disaggregated numbers of group-wise increase in lending rates show that the transmission has been poor in outstanding loans of both public and private sector banks with increase in WALR of 87 bps and 99 bps respectively between May 2022 and February 2023. But in fresh rupee loans, while PSBs increased the WALR by 179 bps, private lenders have hiked it by a much lower 134 bps only.
“Only home loans largely adopt external benchmark rates linked to repo. For other retail products we have the bandwidth to price it based on MCLR, where there are adjustments for costs including the cost of risk and, hence, the transmission was lower in the other products.
Non-home loan retail portfolio of private banks is between 35 and 50 per cent,” said the CEO of a private bank. Foreign banks have seen the best transmission with WALR on outstanding loans increasing 162 per cent and WALR on fresh rupee loans rising at a faster 290 basis points.
Deposit rate flat
Both public and private sector banks have been quite lax in raising deposit rates with the weighted average term deposits increasing 91 and 97 bps, respectively.
Foreign banks have been agile in increasing deposit rates with a 214 bps hike in WADTDR since May 2022.