THE country's largest lender, State Bank of India, has cut deposit rates across various maturities by up to 50 basis points, prompting many analysts to suggest it was only a matter of time before the bank revises its lending rates.
The bank had last cut its Benchmark Prime Lending Rate (BPLR) - a rate used by bankers for pricing corporate and retail loans - in January this year. Bankers say SBI has the highest cost of funds among large banks and the third cut in a single month for deposit rates should enable it to pare this cost.
Over the past fiscal, the bank had aggressively offered above-market deposit rates to customers. Having mobilised the funds, the bank was aggressive while lending in the March 2009 quarter, as witnessed by the expansion of its loan book by 30% over this period. This was much higher than the industry growth rate of a little over 17%.
Analysts say the bank now seems to have realised that the higher cost of deposits was eroding its margins, the difference between deposit and lending rates. The net interest margin of the bank fell below 3% in the March quarter for the first time in the financial year. NII was flat for the March quarter against 35.3% in the December quarter. The bank now seems set to reverse the trend. SBI had a dominant 16% domestic market share in loans as of March 31, 2009, as the bank took advantage of liquidity pressures faced by smaller public-sector and private banks.
"Looking ahead, we expect SBI's overall profitability to decline from current levels, mainly due to higher provisioning costs, as a result of deteriorating asset quality and the compulsion to raise its provisioning levels to industry standards," said Shankar Narayanaswamy, head of Credit Analysis at StanChart, Singapore.
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