Cost of funds prompts SBI volte-face on rates

State Bank of India (SBI) sees a rise in its lending rates — including the base rate — shortly, prompted by tight liquidity conditions and rising cost of funds.

The nation’s biggest lender, which accounts for 18 per cent of loans, has revised its position within a fortnight of deciding to keep its base rate, the new benchmark, unchanged at 7.5 per cent “for the time being”.

A month ago, SBI had said it expected a stable lending rate for three to six months. It last raised lending rates around two months ago.

“There has been a huge amount of pressure on liquidity,” Chairman O P Bhatt said in Mumbai today. “It is not just getting tighter, but liquidity has become more volatile in the system.”

 

Bulk deposit rates have risen in the system, said Bhatt. SBI itself raised bulk deposit rates by more than 100 basis points (bps) recently. It also raised term-deposit rates twice in the last two months. Besides rising cost of funds, the bank will also have to factor in provisioning for loans.

“Against this backdrop, interest rates will go up on the lending side,” Bhatt said, adding that SBI would review raising its base rate this quarter.

SBI is among the few lenders that did not raise its base rate after Reserve Bank India’s mid-quarter policy review on September 16. Since March, RBI has hiked its repo rate by 125 basis points and reverse repo rate by 175 bps in an attempt to curb inflation.

The cost of deposits for the banking industry has been the lowest in a year during the quarter ended September 30. It began to rise from August. SBI’s cost of deposits at the end of June 2010 stood at 5.27 per cent, down from 6.06 per cent at end of September 2009.

Liquidity in the banking system has come under severe pressure since mid-September, due to advance tax outflows and on concerns that Coal India’s Rs 15,400-crore initial public offering, which opens Monday, may squeeze it further.

This week, RBI has had to pump an average '75,600 crore into the banking system each day through its repo auction, a reflection of the tight liquidity condition.

On the bank's credit growth this financial year, Bhatt said advances are likely to grow 18-19 per cent on year. But so far this year, pick-up in credit by industry has been muted, he said.

RBI has projected credit growth at 20 per cent and deposit growth at 18 per cent for the current financial year.