Asset quality worries cast shadow on banks' immediate rate rise plans

Say they’ll wait as higher rates may limit borrowers’ repayment capacity.

Fears of asset quality deterioration have cast a shadow on the timing of a rise in lending rates, as banks are worried that excessively high rates will limit borrowers’ repayment capacity and affect the health of their balance sheets.

Expectations of a rise in lending rates gained ground after the Reserve Bank of India (RBI) raised its key policy rates – the repo and reverse repo rates – by 25 basis points each last week.

The central bank has now raised its policy rates eight times in the past 12 months, as inflation continues to remain high. RBI has also revised its inflation target for March to eight per cent from seven per cent earlier.

Economists and industry analysts expect more policy rate hikes from RBI this calendar year, as inflation continues to remain a concern for the banking regulator.

Banks, however, said they would prefer to wait for more time before raising their lending rates.

“If we raise rates now, what happens if RBI increases the repo and reverse repo rates again in May. We cannot keep raising rates every month. It will affect our customers and the health of our balance sheet,” said a senior official with a Mumbai-based public sector bank.

Banks’ lending rates have hardened by 150-200 basis points since October. While bankers feel another rise of 25 basis points in lending rates is unlikely to stress the credit quality, most of them said they would not increase rates this month.

“As of now, loan EMIs (equated monthly instalments) have not gone up steeply... But if the high inflation persists and rates go up further, then there may be some concerns over asset quality,” RK Bansal, executive director of IDBI Bank told Business Standard.

“We will take a call on lending rates when we review our deposit rates. There is no immediate need to raise lending as well as deposit rates,” he added.

Bankers said factors such as cost of funds, liquidity and credit demand would also play an important role in deciding on a further rate rise.

“Considering the concerns of our customers and looking at the market conditions and interest rate expectations, I think the bank will wait and watch and take an appropriate decision (on a further rate rise) at a later date,” said M Narendra, chairman and managing director of Indian Overseas Bank.

A similar view was echoed by officials of the Union Bank of India. “Excessively high rates may affect banks’ credit quality. I don’t think banks are looking to raise their lending rates immediately. We prefer to wait and watch and take a decision only in April,” said SC Kalia, executive director of Union Bank of India.

Most analysts expect banks to announce a rise in rates after RBI’s annual monetary policy announcement on May 3.

“A lot will depend on the liquidity situation. Interest rates are close to their peaks. If liquidity remains comfortable and deposit rates are not raised, then I don’t think banks will increase their lending rates. I don’t expect banks to raise rates before May,” said Vaibhav Agarwal, vice president, research, Angel Broking.