Interest rates may rise by 100 bps: SBI

Interest rates may rise by 100 bps: SBI
The Economic Times, July 14, 2009, Page 11

Our Bureau KOLKATA

STATE Bank of India (SBI) chairman OP Bhatt on Monday said in no uncertain terms that interest rates had bottomed out and they might start rising after six months. Interestingly, his statement comes days after finance minister Pranab Mukherjee’s assurance that ample funds will be available for corporates even after the government borrows over Rs 4 lakh crore from the market.

Nevertheless, bankers and market players across the spectrum expect the proposed government borrowing to suck out liquidity from the system, something that is likely to push up interest rates. At present, the interbank system has funds of over Rs 1 lakh crore.

“Interest rates may rise 25-50 basis points (bps) or even by 100 bps after three to six months. The extent of the rise will hinge on the management of liquidity available in the system. If liquidity isn’t managed well and demand for bank funds goes up, it is logical that interest rates will harden from current levels,” Mr Bhatt said in Kolkata, at a banking conclave organised by Ficci’s Eastern Regional Council.

He also expressed concern over SBI’s falling net interest margin (NIM). SBI’s NIM is now at 2.32% for the quarter to June 2009, compared with 3.16% for the December 2008 quarter. Mr Bhatt conceded the margin had shrunk below the comfort level, which he pegged at a minimum 2.5%.

“SBI’s interest rates in different loan products are the lowest in the market. We can’t reduce rates further,” he told the gathered businessmen categorically.

“It’s the public sector banks that facilitate economic growth. Despite working with a narrow margin, we continue to spend for improving banking penetration and social sector. If you allow banks to bleed, you will ultimately hurt your own economy and business,” Mr Bhatt said.

Coming back to the economy, government’s net borrowing is pegged at a whopping Rs 3.98 lakh crore in 2009-10 to fund the ballooning fiscal deficit projected at 6.8% of the country’s gross domestic product.

On being asked about SBI’s new ventures, Mr Bhatt said the bank is planning to enter custodian services as two-way joint venture (JV) between itself and French financial major Societe Generale. The foreign partner would take a 35% stake in the JV, which is expected to kick off operation by this fiscal.