End-user lending rates fall to 5-year low in September

India’s Weighted Average Lending Rates (WALRs) dropped 31 basis points in a month to 7.20% in September, the steepest monthly drop in nearly five years since November 2016.

Non-food credit rose 6.8% (yoy) in September compared to 5.1%. Though the growth is on a lower base, sectors like medium sized enterprises, consumer durables and retail loans against jewellery have risen by around 50% during the one-year period. Loans to corporates still continue to contract, but at a slower pace.

“Excess liquidity has been prompting banks to lend at lower rates even at the cost of some margin sacrifice,” said Anil Gupta, credit analyst – financial sector ratings, ICRA. “State-owned banks are likely lent to several government projects, individuals and companies meeting their short-term to medium term credit needs.”

Loan disbursements increased because of government projects aimed at boosting liquidity to smaller companies. “Different government plans to infuse liquidity into the micro, small and medium sector (MSMEs) also created space for loan expansions,” Gupta said.

The net daily surplus liquidity in the system was in the range of ₹6.7 lakh crore and ₹9 lakh crore in September, showed central bank data compiled by Indian Ratings. Excess cash in the system has been reducing through October with the central bank conducting Variable Rate Reverse Repo (VRRR), a window to suck out funds from the system.

Contrary to government-owned banks, private sector lenders raised rates by 15 basis points to 8.98% in September.

“Cash flow is still not so healthy for lower rated companies, which need financing for rising working capital demand. This may have added space for private bank lending,” said Soumyajit Niyogi, associate director at Indian Ratings.

“Surplus liquidity primarily drove PSU banks to offer money at lower rates, particularly when other market-based rates remained competitive,” he said.

Bank interest rates are not yet fully aligned to market rates, a factor that drives corporates at least to sell bonds.

During September, the average rates for triple-A rated five-year corporate bonds were at 6% and at 5.29% for three-year maturity, show Bloomberg data compiled by ETIG. These levels were lower than bank rates.

With September’s sharp dip, the differential has clearly narrowed for public sector banks.

“MCLR for most of the banks have stabilised suggesting that risk premium is falling owing to improved economic conditions amid sluggish demand for credit,” said Niyogi.

A mark-up is added over and above MCLR to arrive at the final lending rate. Between June and September, the median MCLR remained unchanged at 7.30% for public sector banks. During the same period, the gauge was in the range of 8.23-8.30% for private banks.