P&S Bank scraps long-term lending

Punjab & Sind Bank (PSB), one of the few banks still wholly owned by the government, is shunning long term lending because of uncertainty over interest rates.

PSB has begun to focus only on disbursement of short-term loans to provide itself the flexibility to deal with an unpredictable rate environment.

"The signals on interest rates are mixed. In this scenario, the bank wanted to avoid getting locked into loans of a longer duration," G S Matta, executive director, said.

Public sector banks raised their prime lending rates by 50 basis points in May, but are still finding it difficult to protect their margins as their cost of funds has increased much faster.

Banks have raised their deposit rates by as much as 100-200 basis points across various maturities to mobilise lendable resources. Some private sector banks have raised their PLRs by as much as 2 percentage points since January 2006.

PSB focuses on lending to agricultural sector and small and medium enterprises (SMEs). The lending pattern of the bank has been influenced by the fact that close to half its 889 branches are located in Punjab.

The pattern of its branch network has also resulted in the bank having access to a large magnitude of savings and current account deposits. According to Matta, about 52.1 per cent of the bank's deposits are a mix of savings and current account deposits, which has led to a relatively low deposit cost of 4.40 per cent.

The bank is in the midst of a strategy, which aims to double the business mix between 2004-05 and 2007-08, Matta said. The aim is to reach a business mix (deposits plus advances) of Rs 42,000 crore by 2008, he said.

The bank, which received a fresh capital infusion of Rs 500 crore from the government in September 2005, was scheduled to go in for a public issue this year. The aim of the issue was to raise capital to fund its expansion.

Despite the current volatility in the stock market, Matta was hopeful that the bank could go ahead with its issue in the third quarter or fourth quarter.