'Lending rate cut still some time away'

Union Finance Minister Nirmala Sitharaman’s call for making lending rates affordable may not resonate anytime soon as banks still struggle with margin compression, and await clues from the Reserve Bank of India (RBI) on liquidity and rate action.

Hinting that any lending rate cut was some time away, State Bank of India (SBI) managing director Vinay M Tonse said there was still some aggression in the market regarding deposit pricing.

Also, the uptick in the Consumer Price Index (CPI) inflation had impacted the outlook on interest rates, he said on the sidelines of SBI’s Business and Economic Conclave.

The year-on-year (Y-o-Y) inflation rate based on CPI for October stood at 6.21 per cent, above the RBI’s upper end of the tolerance band at 6.0 per cent.

Banks would look for monetary policy stance and policy rate action to decide future actions, Tonse, who looks after the retail business and operations, said.

Most banks follow the policy repo rate as the external benchmark for setting lending rates for retail and small borrowers.

Corporate loans are linked to marginal cost of fund based lending rate (MCLR), that is, to the incremental cost of the funds.

In the monetary policy review in October, the RBI changed the stance to neutral from withdrawal of accommodation raising hopes for a rate action next.

High inflation print in October dampened the spirits.

After raising the policy repo rate by 250 bps between May 2022 and February 2023 to 6.5 per cent, RBI has kept the repo rate unchanged so far.

Earlier this month, SBI executives in post Q2 results interaction had indicated that while the interest rates on deposits peaked, the yield on advances will improve as the bank has increased the MCLR rates.

There was room for further upward revision in MCLR, reflecting the effect of cost of funds.

Speaking at the SBI conclave, Sitharaman described the current high cost of borrowing as “very stressful”.

A chief financial officer of a state-run bank said any lending rate softening hinges on the inflation trajectory.

“The loan rate cuts may become a possibility by the end of this financial year or early next year (FY26).

"With a good monsoon, the hope is that the food price driven inflation may cool down by early calendar 2025 and the RBI reduces policy rates in Q1FY26.

"There is also the issue of protecting interest margins that have been under pressure for the past few quarters.

"The MCLR rates may rise by 5-10 basis points further,” the official said.

Soumyajit Niyogi, director (core analytical group) at India Ratings, said rate cuts on the lending side would take time since banks were still dealing with interest margin compression.

The net interest margin (NIM) for scheduled commercial banks declined by 21 basis points Y-o-Y at 2.62 per cent in the July-September period of 2024.

The rising cost of deposits along with slower growth in low-cost money in current account and saving account impacted the NIM margin, according to CareEdge Ratings assessment.