 "Bank, Banking, PSBs")
The interest rate spread, the difference between average lending rates on outstanding (o/s) loans and the average interest rate on o/s domestic term deposits, for public sector banks (PSBs) touched a new 10-year low of 2.25 per cent in April 2024. The previous low was 2.28 per cent in March 2024, according to rating agency CareEdge analysis.
The spread for PSBs was about 3.0 per cent in May 2014. The PSB spreads have been compressing over the last year. They moved down to 2.82 per cent in May 2023.
While the spread for private sector banks also declined by six basis points (bps) to 3.75 per cent in April 2024 over March 2024, the private lenders have continued to enjoy higher spreads compared to public sector lenders, the agency said.
As for the scheduled commercial bank (SCB) universe, the spread decreased by five bps month-on-month (m-o-m) and reached 2.90 per cent in April 2024. The lending rate on o/s loans of SCBs decreased by two bps sequentially to 9.81 per cent, in contrast, the deposit rate on o/s rupee term deposits increased by three bps to 6.91 per cent in April 2024.
There has been pressure on o/s spreads due to growing competition among banks as well as a drop in the growth of unsecured lending. Spreads between the outstanding lending rate and deposit rate have been hovering below pre-pandemic levels since June 2023, which is exerting pressure on net interest margins (NIMs).
Senior bank executives said the fight for liabilities is and will remain intense this year. At present, banks have limitations on passing on the rising cost of funds to borrowers and this is putting pressure on margins.
The spread between the outstanding lending and deposit rates has narrowed compared to the spread between fresh lending and deposit rates.
In addition, the Reserve Bank of India (RBI) has turned the heat on unsecured lending products by increasing the risk weights. Therefore, banks are going slow in taking exposure to high-yield products such as unsecured personal loans. This would affect yield on loans as well as margins.
Further, with yields on capital market offerings remaining elevated, 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 rating agency added.
