Specialist in Indian Banking and Economic Research

Hemindra Hazari

Is a Securities & Exchange Board of India (SEBI) registered research analyst with over 25 years experience in the Indian capital markets with a specialization in banking and economy research and has managerial experience of establishing profitable equities business, leading and mentoring analysts.  He has worked with prominent foreign and domestic capital market firms such as UBS, Societe Generale, HSBC, ASK Raymond James  and Karvy Stock  Broking and is a regular guest on business media channels and is respected for his non-consensus view on stocks and the market.

For Banks, Cost Management Is the Only Way of Surviving the Long Slump

Covid-Era Restructuring: Look Under the Hood Before Giving Relief

It Will Be Tougher for HDFC Bank to Maintain Its Remarkable Profitability in the Future

HDFC Bank: The Puzzle of Stand-Alone Operating Expenses Being Higher than Consolidated

Thematic (Sector/Industry)

Data from the Reserve Bank of India (RBI) reveal that, in the recent period of declining interest rates, while all banks have been reducing their deposit rates as well as their benchmark rates (marginal cost of fund-based lending rates), in July 2020 private sector banks have increased their effective lending rates on not only fresh loans but also on their outstanding loans. This was first highlighted in the <a href="https://www.thehindubusinessline.com/money-and-banking/why-private-banks-average-lending-rate-on-new-loans-has-gone-up/article32668789.ece#:~:text=Given%20the%20worsening%20business%20environment,the%20lending%20rates%20to%20increase." target="_blank" rel="noopener">Hindu Business Line</a> newspaper of September 23, 2020. Apparently, either private sector banks have turned to higher risk lending, which is unlikely, or have increased the risk spread over their benchmark lending rate to factor the higher risk in the Covid-19-induced slowdown. This has effectively increased the interest rate by 38 basis points (bps), to 9.12%, on incremental rupee loans of private banks in July 2020. It also appears that private sector banks have increased the rate on the entire loans, as the weighted average lending rate (WALR) increased by 5 bps, to 10.71%, in July 2020 as compared with June. The rise in the WALR for private sector banks also may indicate that their quality borrowers too have been penalised, and that these borrowers have not benefited from the overall decline in the interest rates in the economy. As private sector banks continued to lower the term deposit rates in July by 11 bps, and assuming this continues till end-September 2020, the non-risk-adjusted net interest margins (NIMs) of private sector banks may increase in 2QFY2021 as compared with 1QFY2021.

Data from the Reserve Bank of India (RBI) reveal that, in the recent period of declining interest rates, while all banks have been reducing their deposit rates as well as their benchmark rates (marginal cost of fund-based lending rates), in July 2020 private sector banks have increased their effective lending rates on not only fresh loans but also on their outstanding loans. This was first highlighted in the Hindu Business Line newspaper of September 23, 2020. Apparently, either private sector banks have turned to higher risk lending, which is unlikely, or have increased the risk spread over their benchmark lending rate to factor the higher risk in the Covid-19-induced slowdown. This has effectively increased the interest rate by 38 basis points (bps), to 9.12%, on incremental rupee loans of private banks in July 2020. It also appears that private sector banks have increased the rate on the entire loans, as the weighted average lending rate (WALR) increased by 5 bps, to 10.71%, in July 2020 as compared with June. The rise in the WALR for private sector banks also may indicate that their quality borrowers too have been penalised, and that these borrowers have not benefited from the overall decline in the interest rates in the economy. As private sector banks continued to lower the term deposit rates in July by 11 bps, and assuming this continues till end-September 2020, the non-risk-adjusted net interest margins (NIMs) of private sector banks may increase in 2QFY2021 as compared with 1QFY2021.

Private Sector Banks Increase Lending Rates: Securing Themselves Against the Coming NPA Wave?