Bank lending rates

Bank lending rates have risen across the board this calendar year. But this doesn't mean that banks would enjoy a better net interest margin, as a result. While lending rates have gone up, so have borrowing rates. Thus, the spread between lending and borrowing rates will still be more or less the same. Credit offtake has been high in the past one year, with corporate borrowing picking up to fund expansion projects. Since this was not matched by a proportionate growth in deposits, borrowing rates naturally rose. Banks have increased interest rates on term deposits by around 50 basis points on an average lately. They have also been concentrating on raising more wholesale deposits. Now, interest rates offered on wholesale deposits are around 50-75 basis points higher than those offered on term deposits. Certificates of deposits (COD), for instance, contributed to almost 10% of the incremental deposits raised by banks last year. What's more, the interest rates offered on these instruments have increased to around 7% from about 5% a year ago.
This trend of increasing rates is also expected to lead to a drop in the proportion of low-cost deposits, as investors may shift funds to term deposits because of the increase in the yield differential. All this could actually lead to a drop in net interest margins of banks. Besides, public sector banks also face a significant "reinvestment risk" on their bond portfolios. As and when the bonds held by these banks mature, they will have to be replaced with bonds which have substantially lower yields. Needless to say, one way to tackle the pressure on the net interest margin is to shore up the proportion of non-interest income, or fees income. In this regard, private sector banks are way ahead of their public sector.