SBI sheds Rs 4,000-cr short-term loans

Decides not to roll over a part of loans maturing in January and February.

To prevent corporate arbitrage and protect interest margins, State Bank of India (SBI) has cut its short-term loan portfolio by over Rs 4,000 crore by not rolling over a part of loans maturing in January and February.

Many companies are not willing to pay more than nine per cent for short-term loans while the interest rates on commercial paper (CP) and certificate of deposits (CDs) are higher by at least 75-100 basis points. CP and CDs are financial instruments used by companies and banks to raise short-term funds.

Besides the rising cost of funds, there is also an element of companies benefiting from the interest rates prevailing in markets at the cost of banks. Some take money at a lower rate and park it with market instruments, including debt paper. “The bank will not like to lose out due to the corporate arbitrage benefit”, an SBI executive said.

The bank has to strike a balance between absorbing the rising costs of funds and maintaining its net interest margin. Its peak rate on term-deposits shot up from 7.5 per cent in August 2010 to 9.25 per cent in February. In the same period, it raised its prime lending rate from 11.75 per cent to 13 per cent.

SBI’s advances grew by 21.9 per cent to Rs 7,39,971 crore as of December 2010. Credit rose by Rs 46,700 crore in the third quarter as borrowings by oil companies went up due to rise in global crude oil prices. Short-term loans form over 15 per cent of its loan book.

An SBI official said deciding against rolling over some short-term credit would not impact the bank’s credit growth. The country’s largest lender has already indicated about the slowing credit growth in the fourth quarter.

While announcing the third quarter results, Chairman O P Bhatt had said the bank would have to lend Rs 55,000 crore in the last quarter to keep the growth at 20 per cent. However, it may not be able to sustain the same. The bank could give loans worth Rs 46,000 crore so that growth could be 18-19 per cent for 2010-11.

The bank is rolling over short-term credit to companies ready to take loans on new terms (read higher interest rate than loan which matured).

“Some companies, including a housing finance firm, were earlier reluctant to take credit at higher rates but came around after the stiff rise in market rates,” he said.