Are lending rate cuts a desperate attempt to stoke the dying embers of credit offtake?

And the cuts are not the typical piecemeal affair, but a deep slash unseen in years


Deposits are a cost until you get the money off your back through lending, and that is not happening.
Deposits are a cost until you get the money off your back through lending, and that is not happening.

The post-demonetization narrative that initially saw banks as the biggest beneficiaries of a deposit deluge—a massive Rs12.4 trillion at last count—has now morphed into a more balanced one now.

Deposits are a cost until you get the money off your back through lending and that is not happening. Business was hard to come by in 2016 for bankers and 2017 is going to be even harder. Companies have stopped borrowing and the few who did, borrowed from the bond market. Bankers themselves are preoccupied with fixing bad loans rather than going after new customers.

As a consequence, the loan book expanded at an unflattering single-digit pace. But the currency withdrawal worsened it to 5.76% as of 9 December, a glacial pace not seen in more than half a century.

So, banks have now opted to go all out to stoke the dying embers of credit offtake by cutting lending rates. And the cuts are not the typical piecemeal affair, but a deep slash unseen in many years. State Bank of India dropped its benchmark lending rate by a massive 90 basis points and others such as Dena Bank, Union Bank of India and Punjab National Bank have followed suit. Eventually, everyone else will begin cutting rates too.

Bankers and analysts seem to think that this will light a fire under the bank loan book. Firstly, many bankers are betting on pent-up demand and expect retail loan growth to gallop once the dust settles on demonetization. This is quite possible as most individuals would have postponed their discretionary spending to a future date. Two weeks into demonetization, retail loan growth slowed to 15.2% from 18% a year ago, data on credit as of 25 November from the Reserve Bank of India showed.

Secondly, pockets like affordable housing will do well because currency withdrawal has dampened real estate prices to some extent and the government aims to boost rural housing under Pradhan Mantri Awas Yojana. Indeed, home loans in the priority sector grew by 6.6% in November, a bit faster than 6.1% a year ago and this is a credible sign of the affordable space performing better.

In all this, the cost to banks will be an erosion of margins but this will be minimal. Banks have already cut deposit rates deeply and the loan rate cuts announced since Friday were expected. Also, analysts at Jefferies India Pvt. Ltd point out that under marginal cost-based lending rate, banks can choose interest rate reset dates and in retail loans, these are elongated. This means that transmission will take time.

Which is why investors may soon return to bank stocks despite the shares taking a beating on Monday.

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