SBI rate cut hints at deteriorating assets

It is likely that the reduction was done to prevent slippages and rising NPAs from the farm and SME sectors

Bankers are not known for their benevolence, especially when it comes to loan recovery or reduction in interest rates. This is where the sharp reduction in interest rates of SME (small and medium enterprises) and agriculture sector loans by State Bank of India (SBI) alone is a surprise.

Even before the central bank announced any changes in rate reduction (which it ultimately did not on Monday, June 18, 2012), SBI announced reduction in interest rates on SME and agri loans by 50-350 basis points (100 basis points make a per cent). This is not the first time the bank is cutting interest rates for this sector. SBI cut interest rates by 200 basis points in April 2012.

Such sharp interest rate cut within a span of three months raises a number of questions. Either the bank plans to increase its market share aggressively, or the ground realties have changed drastically and the sectors, which have been given this concession are in a bad shape.

If it was a move to increase market share other banks would have also followed by similar cuts. It was not that SBI was way above other banks in its lending rates to these sectors which necessitated a sharp reduction. The bank lends money to the SME sector between 12.5% and 17.5%.

As for growth, agri loans grew by 23.3% in FY12 while SME loans increased by 16.3% during the same period. These sectors where among the fastest growing within SBI. Wholesale and domestic banking grew by 15.8% and 14.4% respectively while large corporate grew by 15% and retail loans grew by 10.9%. Agri and SME together contribute around 29% of the SBI’s loan book.

It is more likely that reduction in rates was done to prevent slippages and rising non-performing loans from these sectors. The bank’s FY12 results betray this fact. Non-performing assets (NPA) of agri loans have shot up by 72% from Rs 4,524 crore to Rs 7,778 crore while that of SME’s have increased by 52% from Rs 7,833 crore to Rs 11,929 crore. NPAs from SME and agri now contribute 15.36% of its NPA as compared to 11.71% in the previous year. In fact of the Rs 4,383 crore of fresh slippages, agri and SME’s account for over one-third of them.

SBI’s management expects a hit of 10-15 basis points to its net interest margin (NIM) due to reduction in rates, however, it will the impact on the non-performing asset in these segment that will be closely watched.