Tag: lending rates

Private sector banks lower lending rates more than PSU Banks during the pandemic, BFSI News, ET BFSI

Banking & Finance

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Private sector banks have been leading the way in reducing cost of funds in the past year of pandemic even as state-run banks are not far behind. While the overall lending rates have fallen as much as 100 basis points, for private banks it has been more.

Weighted average lending rates for outstanding rupee loans of commercial banks fell 96 basis points- bps (one basis point is 0.01 per cent) between March 2020 and October 21, data released by the RBI indicates.

But these rates have fallen more sharply for private sector banks at 109 basis points compared to 85 bps dip for public sector banks and 187 bps for the foreign banks in the country.

The central bank has however lowered its benchmark repo rate much higher by 115 bps during the period and also introduced a number of measures to enhance liquidity of banks to deal with the pandemic induced crisis.

Policy transmission has been much faster pace since the pandemic. In the 19 month period prior to the onset of the pandemic, the benchmark policy 135 bps. But the banks lowered their lending rates only by 15 basis points between March 2019 and March 20 as reflected in the weighted average lending rates on outstanding loans of commercial banks.

A research paper by the Reserve Bank of India economist notes that the transmission of policy repo rate changes to deposit and lending rates of commercial banks (SCBs) has improved since the introduction of external benchmark-based pricing of loans.

The paper also adds that the transmission showed further improvement since March 2020 on account of sizeable policy rate cuts, and persisting surplus liquidity conditions resulting from various system level as well as targeted measures introduced by the Reserve Bank – cut in the cash reserve ratio (CRR) requirements, long-term repo operations (LTROs), TLTROs, refinancing window for All India Financial Institutions (AIFIs), sector/segment specific liquidity measures (Mutual Funds, Small Finance Banks, Micro Finance Institutions/Non-Bank Financial Companies), special open market operations and regular OMOs.



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Festival season offer: Kotak Mahindra Bank reduces home loan rates by 15 bps to 6.5%

Banking & Finance

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With the festival season starting, Kotak Mahindra Bank on Thursday announced a 15 basis point reduction in home loan rates from 6.65 per cent to 6.5 per cent.

“This special rate of 6.50 per cent per annum is a limited period festive season offer beginning September 10 and ending November 8, 2021. With this, Kotak Mahindra Bank continues to offer one of the most competitive rates in the home loan industry,” it said in a statement.

The rate is applicable for fresh home loans and balance transfers and is not linked to the home loan amount.

“Home loans is a growth driver for retail assets for Kotak Mahindra Bank. We are looking to increase our market share in the business. The focus is on fresh sales and balance transfers,” said Ambuj Chandna, President – Consumer Assets, Kotak Mahindra Bank.

The offer will continue from Ganesh Chaturthi to the festivals of Navratri and Diwali, adding that customers take important decisions like buying a home during the festival period.

The focus will be on both salaried and self-employed customers.

The private sector lender had reduced its home loan rate to 6.9 per cent in October 2020 and has since then been further lowering rates.

According to the bank statement, with Kotak Digi Home Loans, applicants can now apply for and receive an instant in-principle sanction letter along with their loan amount eligibility, the tenure of the loan, interest rate and EMI in an end-to-end fully digital, paperless and contactless process.

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Rate of decline in fresh lending and deposit rates slows down: Report

Banking & Finance

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The rate of decline in fresh lending and deposit rates has started to slow down, according to an analysis of the latest Reserve Bank of India (RBI) data by Kotak Securities.

Deposits rates were flat month-on-month (mom) at about 5.6 per cent in November 2020. Fresh lending rates were down about 5 basis points (bps) mom to about 8.3 per cent in the month, the stock broking firm said in a report.

Referring to the spread between average lending rate on outstanding and fresh loans staying around110 bps, the report said: “High spreads do not augur well as it still shows reluctance to lend, in our view.” One basis point is equal to one-hundredth of a percentage point. “While the overall lending rates have declined when we look at the headline rates, the transmission is probably slower when we look at various products or risk segments.”

“In a relatively low growth and heightened risk environment, especially after Covid, we note that the spreads have continued to remain high,”according to authors MB Mahesh, Nischint Chawathe, Abhijeet Sakhare, Ashlesh Sonje and Dipanjan Ghosh.

The spread over G-Sec (government security) with deposits and loan rates has widened, implying banks are seeing lower spreads on investments and better spreads on loan yields, they added. “While we are witnessing some positive trends on recovery in loan enquiries, we still believe that there is still some time before it reflects in loan growth,” the authors opined.

Term deposit rates flat

The report observed that weighted average TD (term deposit) rates were flat mom, for both private and PSU (public sector undertaking) banks. Private and PSU banks have reduced their TD rates by about 110 bps and about 90 bps respectively over the past twelve months.

Wholesale deposit cost (as measured by Certificate of Deposit rates) has seen a much sharper decline of about 320 bps in FY2020, followed by a further decline of about 180 bps in YTD (year-to-date)FY2021, the report noted.

“We have started to see banks, especially private banks, cutting headline TD rates in the past few quarters. The gap between repo and 1-year TD rate for SBI (State Bank of India) has been flat about 90 bps after declining from peak levels of about 130 bps,” the authors said.

Fresh lending rates down marginally

The report observed that private sector banks saw a decline of about 10 bps mom in lending rates on fresh loans to about 8.9 per cent, while PSU banks showed about 10 bps decline.

The authors assessed that the gap between fresh lending rates of private and PSU banks now stands around the 100 bps average level seen over the past twelve months.

Lending rates on outstanding loans were marginally down mom to about 9.4 per cent in November 2020, having declined about 80 bps since November 2019, they added.

“Banks have been cutting their MCLR (marginal cost of funds based lending rate) over the past few months. Private banks and PSU banks have cut their MCLR by an average of about 90-100 bps in the past 12 months,” the report said.

The gap between outstanding and fresh lending rates has been in the range of 110-140 bps for the past nine months.

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What are the less risky options for higher returns on your FDs

Personal Finance

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My wife has a fixed deposit of ₹3-lakh in Dena Bank. Now, with the merger of the bank with Bank of Baroda, we would like to discontinue it and switch it over to some other bank. On checking with Indian Overseas Bank, we found they offer 5.2 per cent for 3- to 5- year tenures . I am looking to invest with a horizon of 3-5 years in a safe and less risky asset with a 7 to 8 per cent yield. Please suggest a suitable investment avenue.

— N.P. Desai

Given that the full financial impact of Covid-related moratoriums and concessions on bank financials is not yet known, it is best to stick to larger and financially stronger banks and NBFCs for deposits at this juncture. Switching your deposit out of Bank of Baroda into Indian Overseas Bank (IOB) for a 5.2 per cent rate is not a prudent course of action in this context as Bank of Baroda is a stronger and larger bank. In the quarter ended September 2020, IOB had reported net profits of ₹148 crore, managing a turnaround from losses in the previous year, with gross NPAs of over 13 per cent and capital adequacy ratio of 10.9 per cent. The bank was also placed under RBI’s Prompt Corrective Action framework.

Bank of Baroda, apart from being consistently profitable, had comfortable capital adequacy of 13.2 per cent as of the same date. Given that RBI’s policy rates today are at their lowest levels in two decades at 4 per cent and market interest rates for highly rated entities are at rock-bottom too, you can get a 7 to 8 per cent return only from riskier entities. Given that the rates may go up at least a bit once the economic situation normalises from Covid, locking into these low rates for periods beyond a year is not advisable. Therefore, it is best not to consider 3- to 5-year fixed deposits currently and stick with up to 1 year deposits even if rates seem unappealing.

Having said this, we can suggest three courses of action given the situation. If you would like a slightly higher yield on your fixed deposits, you can consider the one-year post office time deposits offering 5.5 per cent which offer superior safety with a higher return. If you really seek higher returns and don’t mind some risks with it, you can stay with Bank of Baroda for some of your money and diversify into 1- year deposits from small finance banks such as Equitas for say, one-third of the money. Such banks, however, do lend to riskier segments of small borrowers and, therefore, your deposits are subject to higher risks than with the leading commercial banks like Bank of Baroda.

Deposits with top-rated NBFCs such as Sundaram Finance or HDFC which offer about 5.7 per cent on cumulative deposits of up to 1 year can also be an option. If monthly income is your objective, the Post Office Monthly Income Account offering 6.6 per cent is an option to look at too, though the long lock-in of five years is a deterrent. If your wife is a senior citizen you can also consider the post office senior citizens savings scheme offering 7.4 per cent, albeit with a 5-year lock-in period.

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