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State Bank of India, will raise interest rates for credit abroad to protect its profit as the rupees plunge to a record raises the risk of borrowers defaulting on loans. The bank will increase lending rates to cover the probability of rising bad loans from unhedged currency exposure and higher foreign-currency yields, said Managing Director Hemant Contractor, who heads the lenders international operations.
Foreign loans accounted for 16 per cent of SBIs Rs 10,80,000 crore loan book as of March 31, exchange filings show. The failure by firms to protect against currency swings, combined with rising US Treasury rates, will boost average costs for dollar-denominated debt, he said.
The yields for Indian firms surged in June at the fastest pace since October 2008, according to HSBC Holdings Plc indexes. Raising lending rates for debt taken abroad could help State Bank improve its net interest margin for international loans, which narrowed to the lowest level in two years in the quarter ended March 31.
Banks want to price in risks from rupee volatility and global economic uncertainty, Contractor said in an interview in Mumbai.
Bond yields have gone up in overseas markets. Since we have to tap the markets regularly for meeting the demand, we will have to price loans higher.
Net interest margin on international loans at the lender narrowed to 1.5 percent in the three months to March 31, the lowest in two years, exchange filings show. The measure was at 1.49 per cent in three months to March 31 at state-run Bank of Baroda, compared with 1.68 per cent a year ago.
