Lending rates unlikely to change as banks go into wait and watch mode

In the October 2023 MPC meeting, RBI Governor Shaktikanta Das highlighted that the transmission of repo linked rate by banks to the customers is incomplete

Lending rates of major banks are unlikely to change immediately as banks are on a wait-and-watch mode after the Reserve Bank of India (RBI) maintained status quo in the December 2023 MPC meeting, but reiterated caution on high inflation.

The RBI has been nudging banks to pass on the central bank’s rate cues to customers citing inadequate monetary policy transmission. Despite this, banks may not be able to tweak their lending rates immediately as prevailing market conditions make it difficult, at least four bankers told Moneycontrol.

“With the RBI maintaining a status quo, we do not expect movement in terms of lending or deposit rates in the coming days. The current trend may continue,” said Sarju Simaria, Chief Financial Officer, (CFO), Utkarsh Small Finance Bank.

Also read: Banks yet to fully pass on RBI rate hikes to customers, shows data

A top executive of a public sector bank, who did not wish to be named, also said that in the near future, there would be no change in the external benchmark-linked lending rates (EBLR).

On December 8, the RBI’s monetary policy committee kept the repo rate unchanged at 6.50 percent. The MPC has kept the repo rate at 6.50 percent since February 2023, when it was increased from 6.25 percent to 6.5 percent. Since May 2022, the central bank has raised the repo rate by 250 basis points (bps).

One bps is one hundredth of a percentage point.

Another senior banker with a private sector bank, who too requested anonymity, said banks have maxed out on hiking key rates for now and they would not look at increasing rates further.

“Lending rates are driven by the intensity of competition. And in the recent past, banks have hiked rates to keep their net interest income stable. Hence, we do not see any rise in the near future,” the senior banker said.

As Moneycontrol reported earlier, as per RBI data, the weighted average domestic term deposit rate of banks increased by 233 basis points (bps) and the weighted average lending rate on fresh loans rose by 196 bps in the current tightening cycle.

The corresponding increase in outstanding term deposit rates and outstanding lending rates of banks was even lower at 157 bps and 112 bps, respectively. The weighted average domestic term deposit rate is an indicator of the average interest rate paid by banks on term deposits to customers.

The weighted average lending rate is the interest rate charged by banks on all loans.

In the October 2023 MPC meeting, RBI Governor Shaktikanta Das highlighted that the transmission of repo linked rate by banks to the customers is incomplete. “The transmission of the 250 bps increase in the policy repo rate to bank lending and deposit rates is still incomplete,” Das said during the October 2023 post-MPC press conference.

Another top executive of a bank, who too requested anonymity, said banks may look at raising rates of some segments of business. “Banks may look at market conditions and raise rates in segments like personal and unsecured loans,” the executive said.

To work on increasing its lending rates, a bank considers factors like cost of funds, operating costs, profit margin and so on. Similarly, banks also use marginal cost of the fund-based lending rate (MCLR) to calculate interest rates. Additionally, banks also have an asset-liability committee (ALCO) which manages the financial planning and risk management functions.