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SBI begins selective repricing of loans

By Manojit Saha & Abhijit Lele
October 07, 2009 10:03 IST
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SBI logoAfter slashing term deposit rates aggressively, State Bank of India has begun raising interest rates on corporate loans by up to 50 basis points.

The move is part of the bank's strategy to ensure that its net interest margin -- which is the difference between the cost of funds and the interest earned -- improves over the next few months.

The bank, which saw its NIM drop to 2.30 per cent by June-end, is trying to go back to the 3 per cent comfort zone. Bank executives, however, said that the lender was likely to end the current financial year with an NIM of 2.55-2.6 per cent.

The bank which mopped up over Rs 1,000 crore-a-day at the peak of the financial crisis last year, has lowered deposit rates on half-a-dozen occasions during the current financial year. For retail deposits of up to Rs 1 crore (Rs 10 million), the peak term deposit rate has been lowered by 300 basis points to 7.5 per cent over the last 12 months, while it brought down the prime lending rate by 200 basis points to 11.75 per cent.

While the cost of funds would take time to reflect the changes, this period, marked by a sharp slowdown in credit demand, has affected SBI's interest income.

The impact of a cut in lending rates on interest income was immediate, but the benefit of slashing deposit rates will be gradual. Bank executives said, the subdued NIM was also a reflection of the decline in the credit-deposit (C-D) ratio.

The high margin in September 2008 was possible when the C-D ratio was 71-72 per cent. The ratio has now dipped to 67 per cent due to a slowdown in credit offtake, a fallout of the global financial crisis. "Nothing drastic can be done on the interest income side in the short run," said a senior SBI executive.

While the credit off-take remains subdued, the bank has been able to rework rates offered to large companies and mid-size companies in the second quarter.

"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," an executive said. The reset clause in loan agreements was being used to reset interest rates.

They said the move should help push up margins marginally. As credit offtake gathers momentum in third and fourth quarters, the rate charged on fresh credit could be higher and that should boost margins.

On the deposit side too, the headroom available was limited. Once credit demand picked up, liquidity in the system was expected to come down. In addition, the Reserve Bank of India would also initiate measures as part of its strategy to shift to a tighter monetary policy regime.

Further, SBI and other banks would have to raise rates to counter competition from other asset classes as the stock market sentiments have improved.

But SBI executives said that even if they had to raise rates for retail depositors, the bank's move to offer high rates last year was helping them lower their dependence on high-cost bulk deposits.

As a step towards reducing dependence on bulk deposits, the bank floated a 1,000-day deposit scheme in October 2008, offering 10.5 per cent interest rate aimed to garner retail resources. The scheme has been withdrawn now.

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Manojit Saha & Abhijit Lele in Mumbai
Source: source

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