Repo rate cuts: slow borrowing recovery, big blow to depositors

While the 250 basis point rate cut – the repo rate – accelerated the transfer of rate cuts to the banking system since February 2019, deposit rates have fallen more than lending rates.

The Weighted Average Borrowing Rate (WALR) on fresh rupee loans sanctioned by Scheduled Commercial Banks (SCBs) has fallen 183 basis points (bps), of which 112 bps has been cut since March 2020, the Reserve Bank of India (RBI ) With .

However, the median fixed-term deposit rates (MTDR) – which reflects the prevailing card rates – has seen a sizeable drop of 211 basis points (through February 2021). However, credit decline remained sluggish as large companies relied on the market to raise funds.

The central bank said the adjustment of deposit rates had accelerated subsequently Covid-19 due to persistent excess liquidity with weak credit demand. From March 2020 to February 2021, the MTDR moderated at 144 bps. Over the same period, the one-year median marginal cost of fund-based lending rate (MCLR) fell cumulatively by 94 basis points, suggesting a decrease in the total cost of funds, the RBI said in its ‘Economic Situation’ report.

In short, depositors have seen their income decline since February 2019, while borrowers have benefited from the rate cut. The State Bank of India’s one-year rate, which stood at 7 percent in May 2019, has now fallen to 4.90 percent, a 210 basis point drop. “Savers and retirees have seen their interest income fall accordingly,” said a bank official.

On the other hand, supported by various measures to increase liquidity by RBI in the course of the pandemic, the yield on government bonds (G-sec) traded range.

However, at the long end of the curve, yields hardened, with the 5-year and 10-year Bloomberg Generic G-sec yields from February to March 2021 (until March 12).

“Concerns about the level of market borrowing for the following year, compounded by global spill-overs, as mentioned earlier, sparked sell-offs. However, the rise in the 10-year Indian G-sec was modest compared to the hardening of 10-year US yields by 54 basis points over that period, ”the RBI said.

After G-sec yields, corporate bond yields strengthened across the range of ratings and issuer categories. However, the spreads of corporate bonds over G-secs with corresponding maturities issued by corporations and NBFCs have narrowed further across the rating spectrum, the central bank said.

Although lending rates fell across the board, the credit exception did not rise. SCBs loan growth appears to have bottomed out, as it grew 6.6 percent year-over-year on February 26, 2021, compared to 6.1 percent last year. At the banking group level, growth in loan disbursements from public sector banks (PSBs) stabilized by almost 6 percent in 2021 (January-February), while that of private sector banks (PVBs) and regional rural banks (RRBs) saw a robust increase 8.6 percent and 12.4 percent in February 2021, and the decline in foreign bank (FB) loan growth slowed sequentially, the RBI said.

Bank lending to large industries reduced total bank lending to industry as these companies, especially the highly valued ones, took advantage of the prevailing low interest rate regime and borrowed from the market to pay off some of their expensive bank loans.

The stabilization of overall credit growth is also reflected in the banks’ sectoral lending. Agriculture lending, the brightest spot in sectoral borrowing by SCBs, which accounts for 13 percent of total loans disbursed in FY20, is steadily growing, growing almost double digits in January 2021. Lending growth in the service sector was 8.4 percent in January, driven by strong loan disbursements in the retail, tourism and transportation sectors, the RBI said.

Other services credit increased 17.5 percent in January. Banks’ retail lending for private consumption rose 9.1 percent in January. In the personal loan segment, consumer durables grew robustly at 14.6 percent and other personal loans grew at 12.1 percent in January. There was a sharp acceleration in personal loans for gold jewelry to 132 percent in January 2021 (20.4 percent in January 2020).

While bank lending to industry continued to shrink overall, loan growth was 19.1 percent in January 2021 (2.8 percent a year ago) and by just under 1 percent for micro and small industries (0.5 percent a year) ). January 2020).

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