State Bank, Canara halt loans at lower rates

State Bank of India (SBI), the country's largest bank, and Canara Bank, the third-largest public sector bank, have rid their balance sheets of large amounts of short-term loans at substantially lower interest rates in the third quarter of 2006-07. The banks have taken this move to ease pressure on their net interest margins (NIMs).

Both the banks declined to roll over about Rs 8,000 crore of loans each on maturity as borrowers did not agree on higher interest rates.

SBI has decided to price its loans "aggressively" and not succumb to pressure from corporates to lend at lower rates. It has also held back disbursement of close to Rs 7,000 crore of loans sanctioned earlier.

"We have shed Rs 8,000 crore of low-yielding advances in the first half of the year. We sanctioned another Rs 6,000-7,000 crore of loans, but could not disburse them due to a difference of opinion on pricing. There is an aggressive move within the bank where pricing of assets is concerned," said SBI Chairman O P Bhatt at an analysts' meet to review the bank's second-quarter results recently.

Till a year ago, banks had been extending short-term loans up to one year at rates of 6.5-8 per cent. However, their cost of raising incremental deposits has gone up by 250-300 basis points as banks have been offering up to 9.5 per cent on one-year deposits. One basis point is one-hundredth of a percentage point.

While SBI's NIM dipped to 2.84 per cent at the end of September 2007 from 3.02 per cent a year earlier, Bangalore-based Canara Bank's NIM fell to 2.36 per cent from 3.15 per cent over the same period.

"We have also shed close to Rs 8,000 crore of low-yielding advances. These are typically short-term loans, which we have decided not to roll over," said M B N Rao, chairman and managing director, Canara Bank.

SBI has grown its corporate loan book by only Rs 2,568 crore in the first half of 2007-08. Its loans to mid-sized companies (with an annual turnover of Rs 50-500 crore) grew by Rs 273 crore and to large corporate by Rs 2,295 crore. In 2006-07, the bank's mid-corporate loans portfolio had grown by Rs 22,531 crore.

"The bank has been increasing interest rates on corporate loans by smaller margins of 15 basis points since February," said a senior SBI official.

The share of mid-sized companies and top corporates in total advances made by SBI has fallen by 1 percentage point each to 25 per cent and 11 per cent, respectively, since March 2007.

"Corporates still have substantial cash surpluses. Pricing power is not in the hands of banks. Banks are asking for better rates of interest, so the loan growth has stopped," said a banking analyst.

Banks' cost of deposits is expected to go up further in the succeeding quarters as deposits continue to get repriced at higher rates.

"The cost of deposits may go up further by 5-15 basis points. It has a tendency of seeping in for the next one quarter or so," said Bhatt.

"However, this year, we have planned our liabilities growth in such a way that during the last quarter when the industry will be scrambling for bulk deposits, the pressure on our margins will not be there and NIM will become bigger. NIM should move to 3 per cent by the end of the year," he added.

Canara Bank had decided to prune its high-cost corporate deposits and was not willing to offer more than 9 per cent interest on these deposits to protect its NIM, said Rao.