Average rate for fresh loans rise faster than for existing ones: RBI

K Ram Kumar Satyanarayan Iyer Mumbai | Updated on February 24, 2014

Attributed to hike in policy rates, increasing burden of bad loan in second quarter vis-à-vis the first

The average lending rate of scheduled commercial banks for fresh loans increased more sharply than for existing loans between the first and second quarters of the current financial year.

The weighted average lending rate (WALR) for fresh loans rose by 57 basis points from 11.46 per cent (in the April-June period) to 12.03 per cent (in the July-September period), according to RBI’s quarterly data on WALR.

The WALR for existing loans nudged up 11 basis points from 12.20 per cent to 12.31 per cent.

The second quarter was marked by a hike in key policy rates by 25 basis points in September.

More importantly, in July, in a bid to curb speculation in the foreign exchange market and protect the rupee, the RBI announced several restrictions on banks’ borrowing from it. Effectively, this raised the cost of funds for banks.

The WALR differential between old loans and fresh loans for scheduled commercial banks got compressed from 74 basis points in the June quarter to 28 basis points in the September quarter.

Besides rising interest rates, another reason why the WALR for fresh loans moved up more than that for existing loans could be due to increasing burden of bad loans and banks having to set aside more funds to cover loan losses.

Rates of increase

Scheduled commercial banks include public sector banks, private sector banks and foreign banks.

Public sector banks, as a group, saw the least increase (going up by 38 basis points) in WALR for fresh loans to 11.91 per cent.

Foreign banks saw the highest increase (jumping by 158 basis points) in WALR for fresh loans to 12.18 per cent.

Private sector banks saw their WALR for fresh loans go up by 68 basis points to 12.32 per cent. The WALR for existing loans in the case of public sector banks was rock steady at 12.15 per cent.

Private sector banks and foreign banks saw their WALR for existing loans go up by 47 basis points and 62 basis points to 12.81 per cent and 12.86 per cent, respectively.


Published on February 24, 2014

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