The weighted average lending rate (WALR) on fresh loans rose by 10 basis points (bps) for the banking system to 7.82% in January from the previous month, as per data released by the Reserve Bank of India (RBI). This marks the steepest increase in fresh loan rates since April 2021, resulting from a rise in money market rates and an improvement in credit offtake.
As banks roll back their special festive season pricing offers and the recovery in credit growth becomes more entrenched, analysts and sector experts are taking the view that lending rates may be bottoming out. At 12 bps, the WALR hike was most pronounced at private banks, while public sector banks’ (PSBs) WALR on fresh loans rose 8 bps.
Bankers said that the RBI’s variable rate reverse repo (VRRR) operations have taken the operative rate in the market much closer to the repo rate of 4% than the reverse repo rate of 3.35%. A senior executive with a mid-sized private bank said that since banks are able to place their surplus liquidity with the RBI at a higher rate, the rate of deployment of money is on the rise. “Rates on existing loans cannot increase suddenly because they are linked to the repo, unless the credit ratings change. So higher rates are being seen on new loans where there is more room for better pricing,” he said.
RBI norms mandate that banks must link the pricing of loans to individuals and small businesses to an external benchmark. Since most banks have adopted the repo rate as the external benchmark, rates cannot rise in a big way unless there is a hike in the repo. Changes in spread are allowed only in case of a change in the borrower’s credit rating. These constraints are holding back larger rate hikes, according to bankers.
Loan growth has picked up momentum, clocking rates of around 8% through January and February. This, too, is allowing banks to hike rates. “Once the growth cycle picks up, the pricing takes into account the risk aspect and the expected loss aspect. So there will be some increase, too, in the rates, but there won’t be any meaningful shift until policy rates start going up,” said a senior executive with a large private bank.
Analysts are seeing the emerging trend as a sign of a turn in the rate cycle. Motilal Oswal Financial Services (MOFSL) said in a note on Wednesday, “With the ongoing tightness in rate environment along with potential policy rate hikes by the RBI, MOFSL expects banks to gradually see an increase in their lending yields…Banks with a higher mix of floating rate book stand to benefit from the turn in rate cycle.”
Care Ratings expects loan demand from corporates to return, which should increase banks’ pricing power. “Further with G-sec yields rising, bond yields would also witness an increase, pushing some corporates to the banking system for their borrowing requirements,” analysts at Care said.