Lending rates have also remained relatively elevated since banks are also continuing to keep deposit rates competitive amid intense battle for liabilities.
In contrast, the spread on outstanding loans narrowed by 43 basis points on-year to 2.4%, reflecting pressure on bank margins as lending rates on the existing loan book adjust faster than funding costs.
Data also showed that a gradual shift in banks’ credit portfolios toward secured retail and MSME segments, which typically carry lower yields, has exerted downward pressure on average lending yields, further contributing to the moderation in outstanding spreads.
Despite the cumulative 125-basis-point reduction in the RBI’s repo rate over the past year, the transmission of rate cuts has been uneven. This is seen more in the pricing of fresh loans, supported partly by moderation in incremental funding costs. Adjustments in banks’ outstanding loan books has also been slower due to repricing lags in legacy loans, experts say.
“As a result, spreads on fresh lending have shown some improvement, supported by moderation in incremental deposit costs and stable lending yields,” said Sanjay Agarwal, senior director at CareEdge Ratings. “In contrast, outstanding spreads continue to face pressure due to faster asset-side adjustments. At the same time, liability-side transmission remains relatively sticky, as banks remain cautious in lowering deposit rates amid persistent competition for deposits and the increasing shift of household savings toward alternative financial instruments.”
Experts say margin trends will depend on how quickly banks are able to reprice deposits and how liquidity conditions evolve. “The ability of lenders to rebalance their loan books toward higher-yielding segments while maintaining pricing discipline will also play a key role in sustaining margins,” said Prakash Agarwal, partner, Gefion Capital.
RBI data showed that the weighted average lending rate (WALR) on fresh rupee loans rose 39 basis points sequentially to 8.67% in January, from 8.28% in December. The increase was led by state-run banks, where WALR rose 44 basis points to 8.05%, while private sector banks recorded an 18-basis-point rise to 9.32%.
In contrast, the WALR on outstanding rupee loans declined marginally to 9.04% in January from 9.06% in December, indicating a gradual repricing of the existing loan book.