Bank loans have never been this cheap, RBI data shows

Buoyed by the lowering of repo rate by the Reserve Bank of India (RBI) and surplus liquidity in the financial system, the interest rates on outstanding loans across categories have plummeted to a new low.

The weighted average lending rate (WALR) on outstanding bank loans across the country has gone below the 10% mark for the first time in history and stands at 9.89% in the month of April, according to the latest data published by the RBI.

The lending rate on existing loans of public sector lenders stood at 9.33% and foreign banks at 9.35%.

However, the domestic private banks, which are burdened with a high rate of interest on deposits amid cut-throat competition, are charging 10.9% on existing loans.

In the month of March, the WALR across the scheduled commercial banks stood at 10%.

Since RBI started slashing the repo rate in February 2019, the WALR on existing loans in the country has gone down by 37 basis points, an analysis of RBI data shows.

On the fresh loans, the transmission of the repo rate cuts has been more drastic, falling by a whopping 151 basis points.

The RBI has slashed the repo rate -- the rate at which the central bank lends to commercial banks on an overnight basis for adjustment of liquidity -- by 250 bps to 4% right now, from 6.5% in January 2019.

The WALR on fresh loans stands at 8.3% in April 2020. The lowest interest rates are provided by foreign banks, where WALR is at 7.73%.

For public sector lenders, the WALR on fresh loans stands at 8.04%, while for private banks, it stands at 8.91%.

The private lenders have higher interest rates owing to lower net interest margin spreads.

“Private Banks are especially spread thin with depositor interest rate offerings higher than those of PSBs and foreign banks in order to stay competitive and afloat in a sluggish economy,” says Sonam Chandwani, Managing Partner, KS Legal.

On deposits, foreign banks are giving the least interest of 4.67%. PSBs are giving interest of 6.04% while private lenders are giving 6.32%.

However, the decline in interest rates is not likely to benefit all the borrowers.

“Despite the decline in interest rates, the demand for bank credit is low currently with borrowers unwilling to take on liabilities amidst the economic and business uncertainty.

Also, the benefit of lower rates may not accrue to all segments of borrowers as banks being risk-averse tend to be selective in their lending,” says Kavita Chacko, Senior Economist at CARE Ratings.