PSBs' spreads between lending and deposits rates hit 10-year low of 2.28%

The spreads, or the difference between lending and deposit rates, for Public Sector Banks (PSBs) reached a new 10-year low of 2.28%, while Private Banks (PVBs) maintained a relatively higher spread of 3.81% compared to PSBs.

In March 2024, India's Scheduled Commercial Banks (SCBs) saw a marginal increase in lending and deposit rates, reflecting ongoing adjustments in response to market conditions. According to recent data, the lending rate on outstanding rupee loans by SCBs rose by 2 basis points (bps) to 9.83%, while the deposit rate on outstanding rupee term deposits also increased by 2 bps to 6.88% during the same period.

The weighted average lending rate (WALR) for SCBs, which represents the average interest rate charged on loans, saw a similar uptick. Concurrently,

For fresh rupee loans, SCBs raised the lending rate by 1 basis point to 9.37% in March 2024, while the deposit rate for fresh deposits increased by 18 bps to 6.62%. This adjustment in deposit rates contributed to a compression of spreads by 17 bps during the quarter, reflecting continued transmission of rate changes in the banking sector.

Credit offtake robust

Credit offtake remained robust, expanding by 19.9% year-on-year (y-o-y) to Rs 166.0 lakh crore by the fortnight ending April 5, 2024. This growth was attributed to factors including the impact of HDFC's merger with HDFC Bank and increased demand for personal loans. Deposits also grew by 13.8% y-o-y, reaching Rs. 210.0 lakh crore, including the merger impact.

However, liquidity conditions tightened due to GST outflows, although month-end government spending is expected to alleviate some of this pressure. The Reserve Bank of India (RBI) has been managing liquidity through Variable Rate Reverse Repo (VRR) and Variable Rate Reverse Repo Rate (VRRR) auctions.

Market interest rates, including the benchmark 10-year yield, have risen by approximately 19 bps in response to global factors such as US Treasury yield movements, volatile oil prices, and foreign portfolio investor (FPI) sell-offs. Analysts suggest that the RBI may consider rate cuts later in the year, particularly if food inflation moderates, with expectations of modest rate reductions in the third and fourth quarters of FY25.

Amid growing competition among banks, there has been pressure on spreads, with both outstanding and fresh spreads narrowing. This compression, coupled with RBI's scrutiny of unsecured lending products, could further influence lending rates in the near term. Additionally, elevated yields on capital market offerings are likely to push deposit interest rates higher, shaping interest rate dynamics in the current market environment.