For the bank, the icing on the cake is almost melted | Techy Kings


Central banks around the world have raised interest rates to control inflation. The same is happening in India, with the Reserve Bank of India (RBI) raising the repo rate or the interest rate it lends to banks.

This turned out to be a blessing for commercial banks. However, while they have increased interest rates on loans very quickly, they have taken a slow step when it comes to raising interest rates on deposits.

In a sweet place

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In a sweet place

In April, at the beginning of FY23, the weighted average lending rate charged by commercial banks on new rupee loans stood at 7.51%. By August, the latest data available, this had jumped by 82 basis points (bps) to 8.33%. One basis point is 0.01%.

When it comes to the weighted average lending rate for outstanding rupee loans, the interest rate charged has increased from 8.72% in April to 9.13% in August, a jump of 41bps.

Anecdotal evidence suggests that lending rates rose further in September after the RBI raised the repo rate.

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In comparison, the weighted average term deposit rate for commercial banks’ accumulated rupee term deposits has increased from 5.03% in April to 5.29% in August, an increase of a much lower 26 basis points.

Banks have been able to do this until recently, because they have more deposits than they can lend. In October last year, the bank’s credit-deposit ratio was around 70%, which means that the bank has been lending around 70 of each 100 they take as a deposit. However, as of October 7, the ratio had jumped to 74.5%, meaning banks are now lending almost three-quarters of their deposits. This is the highest credit-deposit ratio for some time.

This means that banks have enough deposits to finance the surge in loan growth that has occurred over the past few months. As of October 7, annual credit growth of commercial banks stood at 16.75%, while deposit growth was at a more stable 9.63%, albeit on a higher base.

This allows banks to quickly raise interest rates on loans under the pretext that the RBI is raising repo rates while slowing down the increase in deposit rates. This ensures that the margin between the interest rate at which banks lend and the rate at which they lend has increased, increasing their overall profitability.

This can be seen in the bank’s September quarter earnings. Take the case of ICICI Bank. Their loan yield rose from 8.12% in the June quarter to 8.63% in the three months ended September 30. In comparison, the cost of deposits increased slightly from 3.46% to 3.55%. This has helped increase the bank’s profitability. Something similar has happened with Canara Bank as well. Deposit costs have increased from 3.99% to 4.09%, while loan yields have increased from 7.03% to 7.24%.

The question is will this continue. Recent data and anecdotal evidence suggest that deposit rates are rising faster now than they were a few months ago. Data from the RBI showed that as of October 14, term deposit rates for deposits of more than one year were in the range of 5.45-6.10%. In mid-August, it was in the 5.30-5.75% range, implying a 35bps jump on the upside. This rate should rise further in the coming months, implying that deposit repricing will now occur at a faster pace assuming credit growth remains strong.

The icing on the cake in the form of deposit rates growing more slowly than loan interest rates may not be available to banks for much longer. At best, banks can benefit from this in the December quarter.

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