SBI raised interest rates on corporate loans after reducing deposit rates

Two days back country’s largest lender the State Bank of India (SBI) reduced its deposit rates aggressively. Now the bank has started increasing interest rates on corporate loans by up to 50 basis points.

This measure is a part of bank’s strategy to make sure its net interest margin (NIM) - improves over the next few months.

Net interest margin (NIM) is the difference between the cost of funds and the interest earned.

By June-end bank NIM has dropped to 2.30 per cent, is trying to attain back the 3 per cent comfort zone. Bank executives informed that the lender is expecting NIM to be at 2.55-2.6 per cent by the end of current financial year.

Last year st the peak of the financial crisis bank had mopped up over Rs 1,000 crore-a-day has reduced deposit rates half-a-dozen times during the current financial year. For retail deposits of up to Rs 1 crore, the peak term deposit rate was reduced by 300 basis points to 7.5 per cent over the last 12 months; however it slashed the prime lending rate by 200 basis points to 11.75 per cent.

It is believed in this period the cost of funds will take time to reflect the changes due to sharp slowdown in credit demand which has affected SBI's interest income.

The impact of cut in lending rates on interest income will be visible immediately, whereas the benefit of reducing deposit rates will be visible gradually. According to bank executives the subdued NIM is the reflection of the decline in the credit –deposit (C-D) ratio.

While in September 2008 the high margin was possible as the C-D ratio was 71-72 per cent. but now because of slowdown in credit offtake and fallout of the global financial crisis the ratio has dropped to 67 per cent. A senior SBI executive stated, "Nothing drastic can be done on the interest income side in the short run".

Thus due to subdued credit off-take it became possible for the bank to rework on rates being offered to large companies and mid-size companies in the second quarter. An executive informed, "We have been able to increase lending rates by up to about 50 basis points, especially for those companies that have come up for repricing". The banks are using reset clause in loan agreements to reset interest rates.

The banks say this measure should help in raising up margins marginally. It is believed as the credit off-take continue to rise in third and fourth quarters, the rate charged on fresh credit can be higher and that must boost margins.

Regarding the deposits the headroom available was limited. Also when the credit demand started picking up, liquidity in the system is expected to come down. Besides, the Reserve Bank of India will also start taking measures as part of its strategy to shift to a tighter monetary policy regime. Moreover SBI and other banks will have to raise their rates to counter competition from other asset classes as even the stock market has started showing signs of improvement.

The SBI executives are of view that even though they have to increase rates for retail depositors, the bank’s measures to offer high rates last year has proved helpful in lowering their dependence on high-cost bulk deposits.

To reduce dependence on bulk deposits, the bank introduced a 1,000-day deposit scheme in October 2008, under which it offered 10.5 per cent interest rate with an aim to garner retail resources. But now the bank has withdrawn this scheme.