Home >industry >banking >SBI sees loan growth jumping from 25-year low after lending rate cut

Mumbai: State Bank of India (SBI), the country’s largest lender, is predicting an acceleration in loan growth from a 25-year low after slashing borrowing costs to the lowest level in at least six years.

The state-run lender cut lending rates based on the marginal costs of funds by 90 basis points across all tenures on Sunday. Other banks including Union Bank of India, Punjab National Bank and IDBI Bank Ltd. also cut their MCLR rates after a surge in deposits following a cash ban in the country brought down the cost of funds.

Deposits have surged at a faster pace at Indian banks than loan growth after people started turning in Rs500 and Rs1,000 notes that are no longer legal tender following a 8 November decision by Prime Minister Narendra Modi to ban high-value currency notes, effectively canceling 86% of cash in circulation. This jump in deposits has cut the cost of funds for lenders, State Bank of India Managing Director Dinesh Khara said.

Also read: SBI reintroduces teaser home loan

“The cut in lending rates will give an immediate boost to consumer loan growth and its ripple effect should have a positive impact on loan demand from companies," Khara said in a telephone interview on Monday. Loan growth at Indian lenders in the year to 25 Novemberfell to 5.8%, the slowest pace of growth since 1992, data compiled by Bloomberg shows.

Modi’s cash ban prompted economists to cut India’s growth forecast and a private gauge indicates that India’s manufacturing sector will shrink for the first time in a year. The Nikkei India Manufacturing Purchasing Managers’ Index was at 49.6 in December, a report showed on Monday, the lowest since December 2015. A number below 50 indicates a contraction.

It will take a lot more than interest rate cuts “to boost credit demand as demonetisation took the wind out of the sails of many sections of the economy," Payal Pandya, a Mumbai-based analyst at Centrum Wealth Management Ltd., said on the phone. “Hopefully by early 2018 we could see loan growth coming back strongly as the economy comes back on track."

The reduction in borrowing costs means net interest margins at the banks will “come under pressure," Morgan Stanley analysts lead by Sumeet Kariwala said in a note on Monday. Large private sector banks are expected to follow state-owned lenders in cutting lending rates, according to the note.

Also read: Steep SBI rate cut sets stage for low-cost loans

A five basis point fall in the net interest margin will reduce the industry’s net income in the year ending March 2018 by four percentage points, according to estimates by analysts led by Aashish Agarwal at CLSA India Pvt.

Shares of non-bank mortgage finance companies including Housing Development Finance Corp. and LIC Housing Finance Ltd. fell most in more than a month on expectation of slower loan growth and narrowing net interest margins. HDFC fell 3.4% while LIC Housing dropped 5.5%.

Mortgage finance companies are expected to see significant rise in requests from customers for transferring their loans to banks that are offering lower interest rates and hence their loan growth and lending margins will fall from “lower portfolio re-pricing," the Morgan Stanley note showed. Bloomberg

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