Bombay:
The unexpected rate hike by the RBI on May 4 will see the banking system gain an average of 10-15 bps on yields, with private banks making bigger gains as 57 percent of their loans are linked to benchmark external rates and 40 percent to the marginal cost of the bond. loan interest, according to a report.
India Ratings says lenders and borrowers will experience volatile times as the Reserve Bank will raise the repo rate by 40 bps to 4.40 percent and the cash reserve ratio (CRR) by 50 bps on May 4. market rates were already higher before the move.
364-day Treasury bills or T-bills are up 120 bps and 10-year Government Securities (G-secs) 140 bps since May 2020, when the repo rate was cut to a record 4 percent, leading to a rise in expectations of a faster and sharper rise in interest rates in the system, but the central bank remained on track to support the fragile economy battered by the pandemic.
Banks’ aggregate returns could improve by about 15 basis points, as at the system level as of December 2021, 39.2 percent of loans were based on the benchmark external lending rate (EBLR) and 53.1 percent on the marginal cost of funds based on of borrowing rate (MCLR), the agency said.
As there will be a direct and more immediate impact on EBLR based loans, those based on the MCLR will be gradual and thus at the system level, yields will increase by 10-15 basis points as a result of the repo increase, but private lenders will benefit more, as 57 percent of their loans are linked to EBLR and 39.9 percent to MCLR, the agency said.
In the case of public sector banks, approximately 28.3 percent of advances are based on EBLR and 61.3 percent on MCLR.
However, the return of the repo rate will be dampened by rising deposit rates which will cap their spreads, especially for those with a higher proportion of liabilities on the shorter side, with the effect of this rate hike being immediate and greater.
The longer-term loans such as home loans and real estate loans are likely to witness a stronger increase in EMIs. To mitigate the impact on cash flow, lenders are likely to become more flexible about maturity extensions, the report said.
The report also said that given the slowdown in a price increase on the deposit side, it will be slow and measured. The share of term deposits in the under-year segment for banks rose from about 73 percent in 2018-19 to 76 percent. About 40 percent of these have a term of less than three months.
On the other hand, Treasury yields are likely to contract significantly for all lenders in 2022-23, the report warned as a 1 percentage point increase in market yields could affect returns on assets of private banks by 5 basis points, state banks by 12 bps, and for the total system at 10 fps. Overall, banks’ profitability expectations for 2022-23 could be modestly tempered; however, if the repo rate rises significantly from now on, the pressure on profitability could increase significantly.
A 100 basis point upward shift in the yield curve could affect the operating profit of state banks before provisions by 7.9 percent, private banks by 2 percent and banking as a whole by 5 percent.
However, the report said that yield growth from NBFCs is likely to be more gradual, as their loans are usually not linked to repo rates, although their own borrowing costs are likely to rise more quickly. For 2022-23, non-bank finance companies (NBFCs) will have Rs 3.4 lakh crore in capital market loans for refinancing which will result in higher debt costs used for these repayments. These are separate from the proportion of bank loans linked to repo rates.
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