The transmission of monetary policy rates by the banking sector has been relatively slow especially on-lending rates, in the last few years. As compared to the repo rate reduction of 175 basis points (bps) over the last two years and a corresponding 175-200 bps cut in bank deposit rates across various tenures, the lending rates by banks have declined by only 90-100 bps compared with the softening of yields in the debt capital markets where the quantum of transmission has been significantly higher.
We estimate that further rate cuts by the central bank to be limited to 25-50 bps in CY17 as the focus shifts to managing inflationary expectations with a close vigil on international commodity prices and impact on capital flows following the beginning of an upward interest rate cycle in the United States. However, with the strong inflow of deposits into the banking system following the demonetisation drive, banks are likely to cut deposit rates further in CY2017. With some banks also contemplating in reduction in the saving deposits rates, we think the deposit rates can come down further by around 50 bps in the CY 2017.
Accordingly, the overall cost of deposits for the banking system can come down by more than 50 bps given that bulk deposit rates have seen a sharp reduction in the recent past, the benefit of which will be seen over the next few quarters.
The annual deposit and credit growth have been sluggish and at multi-year lows, averaging at around 9-10 per cent in the current year till the end of October 2016. A divergent trend during has been seen in November and December on the back of the demonetisation drive, with deposit growth significantly outpacing credit growth by a significant margin.
The sharp reduction in the cost of funds and the continued pressure on systemic bank credit off-take is likely to push banks to reduce to their lending rates in CY17 and thereby improve the transmission rat?es as compared to the past.
We believe that bank lending rates may decline by at least 30-50 bps during CY2017 at a system level though a few banks may get more aggressive as well as they try to attract better credit quality borrowers and gain market share. Any further reduction in interest rates will, to an extent, remain contingent upon the pace of improvement in the asset quality profiles of banks.
With concerns on systemic asset issues likely to linger on for some more time, the scope at this juncture seems limited.
From the borrowers’ perspective, the expected reduction in bank lending rates and the recent measures towards deepening the corporate bond market— including RBI’s measures on large exposure framework for banks and having large corporates raise part of their incremental funding from debt capital markets—would help them reduce their cost of funds by more than 50 bps during CY17, subject to investor appetite.
(The author is group head, financial sector ratings at Icra)
We estimate that further rate cuts by the central bank to be limited to 25-50 bps in CY17 as the focus shifts to managing inflationary expectations with a close vigil on international commodity prices and impact on capital flows following the beginning of an upward interest rate cycle in the United States. However, with the strong inflow of deposits into the banking system following the demonetisation drive, banks are likely to cut deposit rates further in CY2017. With some banks also contemplating in reduction in the saving deposits rates, we think the deposit rates can come down further by around 50 bps in the CY 2017.
Accordingly, the overall cost of deposits for the banking system can come down by more than 50 bps given that bulk deposit rates have seen a sharp reduction in the recent past, the benefit of which will be seen over the next few quarters.
The annual deposit and credit growth have been sluggish and at multi-year lows, averaging at around 9-10 per cent in the current year till the end of October 2016. A divergent trend during has been seen in November and December on the back of the demonetisation drive, with deposit growth significantly outpacing credit growth by a significant margin.
The sharp reduction in the cost of funds and the continued pressure on systemic bank credit off-take is likely to push banks to reduce to their lending rates in CY17 and thereby improve the transmission rat?es as compared to the past.
We believe that bank lending rates may decline by at least 30-50 bps during CY2017 at a system level though a few banks may get more aggressive as well as they try to attract better credit quality borrowers and gain market share. Any further reduction in interest rates will, to an extent, remain contingent upon the pace of improvement in the asset quality profiles of banks.
With concerns on systemic asset issues likely to linger on for some more time, the scope at this juncture seems limited.
From the borrowers’ perspective, the expected reduction in bank lending rates and the recent measures towards deepening the corporate bond market— including RBI’s measures on large exposure framework for banks and having large corporates raise part of their incremental funding from debt capital markets—would help them reduce their cost of funds by more than 50 bps during CY17, subject to investor appetite.
(The author is group head, financial sector ratings at Icra)
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