The RBI released some interesting data today about interest rates on a bank sector wise basis. While we focus on the repo rate, what really matters is the rates at which banks lend onward. And that rate has, as a whole, been coming down!
Let’s first look at the repo rate of the RBI in the last two years. We might have moved to hiking rates recently, but it still remains lower than the highs in early 2012.
And then let’s look at the new data: the lending rates of banks, weighted by the rupee amount of each loan and then averaged, on a bank-group basis:
- Rates have fallen from about 12.6% (for the system as a whole) in January 2012, to about 12.31% in Sep 2013. This remains at a 4% spread above the repo rates.
- For public sector banks - which are the biggest banks as a whole and are responsible for about 70% of all lending, interest rates since 2012 have only gone down.
- Private sector and Foreign banks have either been steady or hiked rates, even though, till Sep 2013, the cost of repo was falling!
This data is only till Sep 2013, which was the start of the rate hiking cycle. We’ll know in a few months what lending rates were for the December quarter - are we going to see a sharp move up? And will private banks have moved their rates even higher?
My view is that Private banks have realized that there are big NPAs coming, and raised rates. Public banks have been politically motivated to not do this; which is why they lent more, at lower rates, and their NPAs are very high and unmanageable today.