• In January 2023, the rate of increase for deposit rates as well as lending rates on fresh loans continued in
double digits.
o The weighted average lending rate (WALR) on fresh rupee loans of SCBs increased by 12 basis points (bps)
from 8.88% in December 2022 to 9.0% in January 2023.
o The weighted average domestic term deposit rate (WADTDR) on outstanding rupee term deposits of SCBs
increased by 12 bps from 5.78% in December 2022 to 5.90% in January 2023.
o 1-Year median Marginal Cost of Fund based Lending Rate (MCLR) of SCBs increased from 8.35% in January
2023 to 8.45% in February 2023.
• Private Sector Banks (PVB) and Public Sector Banks (PSB) have maintained high spreads between lending and
deposit rates, with PVBs seeing higher spreads, as banks raised rates amid RBI’s tightening moves. Rate hikes
and subsequent faster resets in lending rates vs. deposit rates have led to NIM expansion in the near term
however, the widening gap between credit and deposit growth amidst tightening liquidity is leading to
aggressive pricing of deposits.
• CareEdge expects the uptick in the deposit rate to continue given the widening gap between credit & deposit
growth and tightening liquidity conditions.

Continued Widening Credit and Deposit Growth Gap Coupled with Lowering Liquidity Levels

Credit demand has been recording double-digit growth driven by increased working capital requirements, NBFCs
and demand revival. The gap between credit offtake and deposit growth is at the highest over the past 10 years
(excluding the 2016 deposit growth during demonetization). Meanwhile, comparatively lower deposit mobilisation
and pick-up in credit offtake have pushed the credit deposit ratio to nearly 75.5% as of February 10, 2023. The banking system liquidity surplus has narrowed from Rs 6.3 lakh crore at the start of FY23. The banking system

liquidity stayed in deficit in the second half of December due to advance tax outflows and GST payments. These
tightening liquidity conditions have pushed the short-term interest rates higher. The short-term Weighted Average
Call Rate (WACR) has increased by 89% y-o-y to 6.55% as of February 10, 2023.WALR on fresh loans continues to reflect the rising interest rate cycle faster as it increased m-o-m for PSBs (14 bps), PVBs (5 bps), and SCBs (12 bps). PVBs and SCBs fresh lending rates have moved past their Mar-20 levels.,

WALR on outstanding loans too has witnessed a m-o-m increase across all segments, PSBs (5 bps), PVBs (6 bps),
and SCBs (6 bps). On m-o-m basis, the spread between WALR O/s loans and WALR fresh loans for PSBs narrowed
due to a higher rise of WALR on fresh loans as compared to WALR on O/s loans, while the spread increased for
PVBs in January 2023.

Deposit rates for PSBs, PVBs and SCBs rose m-o-m by 13 bps, 13 bps and 12 bps, respectively in January 2023,
however, they continue to be lower than their pre-pandemic levels (as of March 2020) by around 50 bps, indicating
the distance the deposit rates have yet to traverse to reach the repo rate as well as their pre-pandemic levels, let
alone move past the same. Banks have raised lending rates in-line with an increase in repo rates over the last few
months. However, the aggregate increase in deposit rates has been lower than the rise in lending yields. As banks
continue their focus on deposits with increased intensity, a sharper increase in deposit rates is anticipated, thus
driving an increase in funding costThe spread of SCBs between WALR (O/s) and WADTDR (the net interest rate spread) stood at 3.68% in January 2023.

The spread narrowed in January 2023 for PSBs (8 bps), PVBs (7 bps) and SCBs (6 bps) as deposit rates
continued their rise. On a y-o-y basis, PSB and PVB spreads narrowed, while the spreads of both PSB and PVBs
have continued to remain elevated compared to the pre-pandemic levels. PVBs continue to maintain a higher spread
given that they charge more as compared to PSBs while paying out at a similar rate.