Rate hike: Lenders see margin gains of 10-15 basis points from rate hike: report
Saying that lenders and borrowers will face volatile times as the Reserve Bank raises the repo rate by 40 basis points to 4.40 percent and the cash reserve ratio (CRR) by 50 basis points on May 4 in an off-cycle policy move , India Ratings said market rates were already rising ahead of the move higher.
364-day T-bills are down 120 basis points since May 2020 and 10-year G-Sec. Soared 140 basis points as the repo rate was cut to a record 4 percent, leading to expectations of a faster and stronger rise in interest rates in the system, but the central bank stayed the course to ease the pandemic-stricken weakness to support economy.
Banks’ overall returns may improve by about 15 basis points because, at the system level, as of December 2021, 39.2 percent of loans are based on the external benchmark-based lending rate (EBLR) and 53.1 percent are based on the marginal cost of funding lending rate (MCLR) , the agency said.
As there will be a direct and immediate impact on lending based on EBLR, lending based on MCLR will be phased and therefore system level yields will increase by 10-15 basis points due to the repo lift, but private lenders will benefit from it benefit more given that 57 percent of their loans are associated with EBLR and 39.9 percent with MCLR, the agency said.
At the public banks, around 28.3 percent of the advances are based on EBLR and 61.3 percent on MCLR.
However, the repo rate return will be cushioned by rising deposit rates which will limit their spreads, particularly for those with a higher proportion of liabilities at the shorter end, with the impact of this rate hike being immediate and larger.
Longer-dated loans such as home loans and home loans are likely to see a larger increase in PMIs. To mitigate the impact on cash flow, lenders are likely to become more flexible in terms of term extensions, the report said.
The report also said that given the delay in price increases on the deposit side, they will be slow and measured. The share of term deposits in banks with maturities of less than one year increased to 76 percent from around 73 percent in FY19-21. Of these, around 40 percent have a term of less than three months.
On the downside, Treasury revenues are likely to shrink significantly in FY23 for all lenders, the report warned, as a 1 percentage point rise in market yields could hurt asset returns by 5 basis points for private banks and 12 basis points for state-owned banks, and for the system as a whole around 10 bps. Overall, banks’ profitability expectations for fiscal 23 can be moderately dampened; However, should the repo rate rise significantly from now on, the pressure on profitability could intensify significantly.
A 100 basis point upward shift in the yield curve can hurt state-run banks’ pre-provisioning operating profit by 7.9 percent, private banks by 2 percent and the banking system as a whole by 5 percent.
However, the report said that NBFCs’ yield rises are likely to be more gradual since their lending is largely unpegged to repo rates, although their own borrowing costs are likely to rise faster. For FY23, the NBFCs have Rs 3.4 crore capital market loans to refinance which will result in higher borrowing costs for these repayments. That being said, the proportion of bank borrowings that are pegged to repo rates.
The amount of the increase passed on depends on the business areas in which you are mainly active. For example, the carry-over of increased interest rates is likely to be higher in segments such as small-ticket loans against real estate, used-car loans, unsecured commercial loans, and personal loans. However, the highly competitive segments such as home loans, new vehicle loans and large ticket LAPs could result in lower carryover, it said.