Mumbai: A fortnight has passed since the Reserve Bank of India (RBI) raised its policy rate, but only two private sector banks have so far raised their loan rates since and not many banks are eager to follow suit.
After the first quarter policy rate hike in July, 32 banks hiked their rates in the first week and another 14 a week after that.
Most banks have refrained from raising their loan rates as there aren’t too many takers for bank credit. While most corporations are opting to wait and watch as they expect the policy rate to start going down sooner rather than later, those who are willing to borrow money at a high cost may not be able to pay back on time. This means banks are running the risk of piling up bad debts.
While year-on-year (October 2010 till September 2011) loan growth is 20.4%, the growth so far this fiscal year is only 3.4%.
In the April-June quarter, the industry’s gross non-performing assets, or NPAs, rose by 7.64%—from Rs 60,685 crore in the January-March quarter to Rs 65,318 crore. It was the highest increase in bad loans in a quarter since July-September 2006.
The central bank had on 16 September hiked its policy rate by 25 basis points to 8.25%, its 12th hike since March 2010, to fight a persistently high inflation in the world’s second-fastest growing major economy after China. One basis point is one-hundredth of a percentage point.
Since then, only ING Vysya Bank Ltd and Dhanlaxmi Bank Ltd have raised their loan rates.
According to Amandeep Goraya, analyst at GEPL Capital Pvt. Ltd, both loan as well as deposit rates have not been increased by most banks because they are expecting interest rates to be near their peak. “Also, hiking rates could have a negative impact on loan demand.”
“Banks have probably not hiked rates because credit growth has shown no signs of improving... Deposit rates are flat for the last six months except in some select baskets because banks have to match their assets,” said an analyst with a Mumbai-based brokerage, who did not want to be named.
“Banks have not hiked rates maybe because they are reviewing or even absorbing the hikes... RBI governor has been clearly hawkish, which means that there could be more hikes and banks will have to pass it on. They do not have the holding power now because they have to maintain their margins,” said Chaitra Bhat, analyst at LKP Securities Ltd.
“These decisions (to hike loan and deposit rates) do not work in isolation. There are too many forces working in the market and we will have to wait and watch how the market dynamics react and then take a call,” said K.R. Kamath, chairman and managing director of Punjab National Bank.
S. Raman, chairman and managing director of Canara Bank, also said it’s not that monetary transmission is not happening, “only that it could be delayed”.
Raman said the government’s decision to increase its borrowing programme by Rs 58,500 crore will put pressure on loan rates and deposit rates too may go up.
“The extra borrowing programme might add a new element in the equation,” he said.
Bankers are also hopeful that with the end of the first half of the financial year, the so-called busy season will kick in and the industry will start borrowing.
Yields on government bonds have risen after the announcement of the increase in the government’s borrowing programme.
A week after the central bank hiked its policy rate in May, only three banks raised their loan rates in the first week and one in the second week. However, within a month, 38 banks hiked their deposit and lending rates.
Analysts say banks are not raising rates because people are keeping money with banks for safety with the stock market in a bear phase and the price of gold staying volatile. Once the demand for credit picks up, banks will be compelled to raise their deposit rates to mop up money, they say.