Depositors benefit more than borrowers this rate hike cycle
rate tightening cycle where depositors are benefiting as banks scramble for funds while borrowers felt the pinch due to the linking of rates to repo rate. But banks could face the heat as margins are under pressure.
While weighted average lending rates rose 110 bps ( one basis point is 0.01 percent) since the 250 bps rate hike from l May 2022 onwards, weighted average term deposit rates on outstanding deposits rose 157 bps till August, according to central bank data. This is in juxtaposition of past occasions when central bankers often complained that banks are quick in transmitting rate hikes to loans and not so fast in raising deposit rates.
“The demand for funds is high given the credit growth of 15-16 percent.
Banks need to garner more funds through deposits even at higher rates” said Sachin Gupta, chief rating officer CareEdge Ratings “ Besides some banks are focusing on building durable long-term and stable funding sources even if it means paying higher interest.”
Transmission on fresh deposits is also higher than on fresh loans, the Reserve Bank data indicates. While the weighted average rate on fresh loans rose 196 bps.
That on fresh deposits rose 233 bps since the May rate hike cycle. «In India, citizens are moving away from traditional savings products like fixed deposits to mutual funds and non-convertible debentures for higher returns.
So, banks are compelled to attract higher rates to attract deposits,» said Kuntal Sur, PwC India's financial services risk consulting head.
The slow transmission to lending rates is also believed to be because of slow pick up in large corporate loans. «On the other hand, the lending to good borrowers by scheduled commercial banks remains competitive as the good projects are
