Deposit rates rise faster than lending rates in March 2023: CareEdge

• With an increase in credit offtake, the credit deposit ratio reached almost 75.04% as of April 7, 2023.
• In April, the banking system's liquidity changed from a deficit to a surplus due to government spending and the Reserve Bank of India's (RBI) foreign exchange intervention.
• In the current environment of rising interest rates, the median 1-year MCLR for Scheduled Commercial Banks increased from 8.55% in March 2023 to 8.6% in April 2023.

In March 2023, both lending and deposit rates rose, but the rate of increase was faster for the deposit rates than lending rates. Moreover, the rates for fresh business (new loan taken by a borrower) have increased at a faster clip when compared to rates for outstanding business (old loan that is yet to be repaid).

March also witnessed a surge in credit demand due to growth seen in personal loans, working capital loans, and the participation of non-banking financial companies (NBFCs) resulting in double-digit growth, according to a BFSI Research report by credit rating agency CareEdge.

Credit deposit ratio reaches almost 75.04% on April 7

However, the mobilisation of deposits has been relatively low, and the credit offtake has increased, causing the credit deposit ratio to reach almost 75.04% as on April 7, 2023.

At the beginning of FY23, the banking system had a surplus of ₹6.3 lakh crore in liquidity. However, it has reduced over time and eventually turned into a deficit towards the end of FY23. Hence liquidity had been injected into the system.

In April, the banking system's liquidity changed from a deficit to a surplus due to government spending and the Reserve Bank of India's foreign exchange intervention. However, the liquidity infusion was somewhat offset by the redemption of long-term repo operation (LTRO) and targeted long-term repo operation (TLTRO).

LTRO and TLTRO are monetary policy tools used by the RBI to inject liquidity into the banking system.

Weighted average call rate rises to 6.52% as on April 21

To maintain liquidity at a neutral level, the RBI may continue to conduct variable rate reverse repo (VRRR) auctions – a tool used by the RBI to manage liquidity in the banking system. There has been an increase in the short-term weighted average call rate (WACR) from 3.53% as of April 22, 2022, to 6.52% as of April 21, 2023.

This rise in WACR can be attributed to a combination of higher policy rates and a reduction in liquidity within the system. The WACR is an indicator of the overall liquidity conditions in the banking system.

Lending rates on the rise

The weighted average lending rate (WALR) – which is the weighted average of all the interest rates that a bank charges on its outstanding loans – on fresh loans has continued to increase month-over-month (M-o-M). For public sector banks (PSBs) it’s up by 11 basis points (bps), for private sector banks (PVBs) by 21 bps, and for scheduled commercial banks (SCBs) by 8 bps.

The lending rates on fresh loans for PSBs, PVBs, and SCBs have surpassed their levels in March 2020. In addition, the WALR on outstanding loans has also increased M-o-M across all segments – for PSBs by 7 bps, for PVBs by 4 bps, and for SCBs by 5 bps. Interestingly, foreign banks have experienced a decrease in their lending rates. The spread between the WALR on outstanding loans and WALR on fresh loans for PSBs and PVBs has continued to narrow M-o-M due to a higher increase in WALR on fresh loans than on outstanding loans.

In the current environment of rising interest rates, the median 1-year MCLR (marginal cost of funds-based lending rate) for SCBs increased from 8.55% in March 2023 to 8.60% in April 2023. Despite the Monetary Policy Committee (MPC) taking a pause from rate increase at its last meeting, banks have continued to raise rates. This has had a faster impact on the lending rate of new loans, while older loans are re-priced based on specific repricing dates. As a result, the spread between the WALR for outstanding loans and the WALR for new loans is expected to narrow in the short term and stabilise in the medium term.