Expect Little Change in India’s Lending Rates

Lending rates for India’s corporate and retail borrowers are unlikely to see “significant reduction” in 2012 and 2013, CRISIL Research projected. Continued tight liquidity, increases in government borrowing and the high cost of funds for banks will limit the decline in interest rates, it explained.

CRISIL ResearchLending rates are, therefore, likely to fall by 25 to 50 basis points (bps) over the next year, lower than the 50 to 75 bps drop expected in ”repo rate,” or the rate at which banks borrow rupees from the Reserve Bank of India (RBI), as banks attempt to protect their margins, CRISIL Research stated.

However, banks might selectively offer attractive rates to new customers by adjusting their spreads over the base rate to stimulate credit demand, the research firm noted. RBI is scheduled to announce annual monetary policy for 2012 to 2013 on April 17.

CRISIL Research said that liquidity in the banking system has remained tight despite RBI’s phased reduction of 125 bps in the cash reserve ratio (CRR) since the beginning of 2012. It noted that average daily borrowings of banks under the liquidity adjustment facility were at $26.22 billion (INR 1.34 trillion) for the four months ending in March 2012 — almost twice the RBI’s comfort figure of one percent of net demand and time liabilities.

The credit tightness can be primarily attributed to lower accretion to deposits vis-à-vis credit growth, and RBI’s intervention in the foreign exchange market to arrest the decline of rupee, CRISIL Research stated.

The incremental credit-to-deposit ratio has shot up from 80 percent as of September 2011 to 96 percent by March 2012 due to low deposit mobilization, it noted.

Prasad Koparkar, senior director for industry and customized research, at CRISIL Research, said that deposit growth has slowed dramatically to a seven year low in 2011 and 2012, while credit growth has been relatively stronger. The deposit mobilization has been especially lackluster in the second half of the year and only one-fourth of the incremental deposits garnered during 2011 and 2012 came in during this period, as against an average of 57 percent in the preceding seven years, he explained.

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