Don’t Bank On Cheaper Loans Just Yet, Says SBI
SBI’s CFO says lending rates may not come down any time soon.
Expectations of a sharper-than-usual cut in banks’ benchmark lending rates were cut short over the weekend after the Reserve Bank of India decided to change cash reserve ratio (CRR) requirements to control systemic liquidity.
“To the extent that this stays (RBI’s measure on CRR), it curtails our ability to transmit the reduction in deposit rates through MCLR (margin cost of funds lending rate),” said Anshula Kant, deputy managing director and chief financial officer at State Bank of India in an interview with BloombergQuint.
In a release on Saturday, the RBI said that banks would need to maintain an incremental cash reserve ratio of 100 percent on deposits received between September 16 and November 11. This will be reviewed on December 9, the RBI said.
Based on RBI data, this will pull out around Rs 3.25 lakh crore for the banking sector as a whole.
“We are not disclosing that data,” said Kant when asked how much more SBI would need to deposit with the RBI after the change in regulations. “The change has increased the cost of carry. If you look at the calculation of MCLR, one of the inputs is the cost of carry.”
In a note released on Monday, brokerage firm Motilal Oswal Securities said it expects the banking system to face a Rs 2,000 crore loss in net interest income as against the earlier expectation of a gain of Rs 2,000-3,000 crore.
Earlier these deposits were supposed to be parked in government securities or reverse repo which in turn would have enjoyed a spread of 2-3 percent, and now this would have a negative carry of 3-4 percent.Motilal Oswal Securities Report
Ratings agency CRISIL echoed this view in its latest report. “Banks could delay cutting their lending rates given that they have promised at least 3-4 percent interest rate to savings account depositors, but will be not be receiving any interest on the deposits impounded for CRR,” it said.
Earlier, on account of the flood of deposits after the central government’s demonetisation drive, banks were anticipating that they would be in a position to reduce their benchmark lending rates by a sizable amount.
Since April this year, when the MCLR method of calculating loan rates replaced the base rate method, SBI has cut its benchmark rate by 30 basis points. According to norms stipulated by the Reserve Bank of India, banks review their benchmark lending rate once a month.
On three occasions since April 1, SBI cut its MCLR by 5 basis points. The latest cut, by 15 basis points, came at the start of November.
Demonetisation: Impact On Deposit Rates
Only last week, SBI slashed bulk deposit rates by up to 1.9 percentage points. These deposits, however form only around 8 percent of the bank’s domestic deposit book and are unlikely to be cut much further, said Kant.
The decline in retail deposits has been much more gradual, the result of the bank’s attempt to protect the returns to retail depositors and senior citizens, according to SBI’s chief financial officer. The bank last changed its fixed deposit rates for retail customers by up to 15 basis points on some maturities on November 17.
Kant feels that while the bank will not be able to hold off for long on cutting these rates, the downward trajectory of consumer price inflation will ensure that real interest rates are protected.
Consumer price inflation eased to 4.20 percent in October, compared with 4.39 percent in September.
“We can’t hold off as much as we would like to (on deposit rates), but inflation trajectory also being very steeply downward, so 4.2 percent was the last number we got, and again even without this demonetisation our house view is that it would have been lower than 4 percent in November,” said Kant.
With inflation trending downward, expectations of a rate cut by the RBI in the first week of December are building; another trigger for lowering deposit rates.
The Demonetisation Windfall
As of Friday, SBI had accepted Rs 2.07 lakh crore in old Rs 500 and Rs 1,000 currency notes since November 9, when Prime Minister Narendra Modi launched his government’s demonetisation drive.
Net of withdrawals and exchanges over the counter, the addition to SBI’s deposits between November 9 and November 25 was Rs 1.13 lakh crore, said Kant. A significant portion of this, Rs 1.05 lakh crore, was through current account and savings account deposits.
The net addition is approximately 6 percent of the bank’s total deposits at the end of September, which stood at Rs 18.59 lakh crore.
Seeing Slowdown In Credit Growth
Kant believes that the medium-term outlook on SBI’s credit growth remains intact, but she does see some signs of a slowdown in the short-term.
Given that this demonetisation has come in the month of November, one of course auto sales are slower in the month of November, so auto loans may go down a little. But home loans also, from some pockets, our sales teams are reporting that demand is not as strong as it was in the previous month.Anshula Kant, Deputy MD & CFO, SBI
According to analysts, the slowdown in credit growth was made worse on account of the government’s demonetisation effort. Companies, seeing better rates in the short-term debt markets, were already circumventing the banking system for their near-term needs.
Corporate credit was slowing, and the real growth drivers were mortgage loans, and other forms of retail credit, and that is now slowing. In public sector banks, processing of loans has slowed at the moment, and there is also a likelihood of some of the smaller SMA-2 loans slipping.Abhishek Bhattacharya, Director & Co-Head, Banks & Financial Institutions, India Ratings & Research
Margins To Suffer
On account of the RBI’s latest move to mop up surplus systemic liquidity using the cash reserve ratio, banks’ margins are likely to take a hit, analysts said.
“There will be some impact on margins, but it will be very hard to say how much,” said Kant. “As of now, we’re being told it is a temporary measure, and we’re quite confident that it will be reviewed on or before December 9. If it’s only for 13 days, the impact (on margins) won’t be very significant.”
On incremental deposits received after November 10, SBI is paying a blended rate of around 3.5 percent, said Kant. This, she said, is a back of the envelope calculation based on the fact that around 74 percent of these new deposits are savings account deposits and the rest are zero percent current account deposits.
SBI, like its peers, has been deploying these excess funds in the RBI’s term reverse repo window. It has also been investing in treasury bills, and some liquid funds, Kant said. The blended return on these investments is around 6 percent, resulting in a margin of 2.5 percent.
The bank’s net interest margin in the second quarter stood at 3 percent.
Kant explained that while margins could fall in the near term, the incremental deposits received after November 10 and the investments made thereafter would lead to sizable profit gains, because there is no capital expenditure involved.