Repo rate cuts: Slow pick-up in borrowing, big hit to depositors

The central bank said the adjustment in deposit rates accelerated in the aftermath of Covid-19 on account of persistent surplus liquidity amidst weak credit demand. During March 2020 through February 2021, the MTDR moderated by 144 bps. During the same period, the one-year median marginal cost of funds-based lending rate (MCLR) softened cumulatively by 94 bps, indicating reduction in overall cost of funds, the RBI said in its report on the ‘State of the Economy’.

In short, depositors have seen their income shrinking since February 2019, while borrowers benefited from the rate cut. State Bank of India’s one-year term deposit rate, which was at 7 per cent in May 2019, has now fallen to 4.90 per cent, a decline of 210 bps. “Savers and pensioners have seen their interest income declining accordingly,” said a bank official.

On the other hand, buoyed by various liquidity enhancing measures initiated by the RBI in the wake of the pandemic, the yield on government securities (G-sec) traded range bound.

At the long end of the curve, yields, however, hardened, with the 5-year and the 10-year Bloomberg generic G-sec yields firming up by 64 bps and 33 bps, respectively, during February-March 2021 (up to March 12).

“Fears over the size of the market borrowings for the ensuing year amplified by global spill-overs as discussed earlier trigge­red sell-offs. The rise in the 10-year Indian G-sec was, however, moderate relative to the hardening of the US 10-year yield by 54 bps during this period,” the RBI said.

Tracking G-sec yields, corporate bond yields firmed up across the rating spectrum and issuer categories. Spreads on corporate bonds over G-secs of corresponding maturity issued by corporates and NBFCs, however, continued to narrow across the rating spectrum, the central bank said.

Although lending rates fell across the board, credit offtake did not pick up. Credit growth of SCBs appears to have bottomed out as it grew at 6.6 per cent year-on-year on February 26, 2021 compared with 6.1 per cent last year. Bank group-wise, growth in credit disbursed by public sector banks (PSBs) stabilised close to 6 per cent in 2021 (January-February), that of private sector banks (PVBs) and regional rural banks (RRBs) clocked robust pickup to 8.6 per cent and 12.4 per cent, respectively, in February 2021, and contraction in credit growth of foreign banks (FBs) tapered sequentially, the RBI said.

Bank credit to large industries pulled down the overall credit to industry by banks as these firms, especially the high rated ones, took advantage of the prevailing low interest rate regime, and borrowed from the market to pay off part of their high-cost bank credit.

The stabilisation in overall credit growth is also evident in sectoral disbursement of credit by banks. Credit to agriculture, the brightest spot in sectoral credit offtake by SCBs, which accounts for 13 per cent of the total credit disbursed in FY20, is rising steadily and grew at near double digits in January 2021. Credit growth to the services sector was at 8.4 per cent in January, propelled by strong credit disbursals to trade, tourism and transport sectors, the RBI said.

Credit to other services grew at 17.5 per cent in January. Retail lending by banks for personal consumption grew at 9.1 per cent this January. Within the personal loan segment, loans for consumer durables posted a robust growth of 14.6 per cent in January and other personal loans grew at 12.1 per cent. There was a steep acceleration in personal loans against gold jewellery to 132 per cent in January 2021 (20.4 per cent in January 2020).

While overall lending by ba­nks to industry remained in contraction, credit growth to medium industry was at 19.1 per cent in January 2021 (2.8 per cent a year ago) and to micro and small industries, inched close to 1 per cent (0.5 per cent in January 2020).