SBI chairman says interest rates can be hiked in 6 months

On Tuesday the chairman of State Bank of India, the country's biggest lender, said since last October the interest rates have been falling but there are chances that interest rates might get strengthen in six months as credit is picking up. O.P. Bhatt informed reporters as the increase in business activity can be seen which in turn will result in higher loan growth in the second half of the year. He added, "Six months down the line with credit rising and the entire borrowing taking place, rates will either stabilize or even harden".

"There are lots of signs available in the economy that business activity is increasing across multiple sectors. But it is still not showing up in bank lending. We believe that with time lag it is going to happen." Since last October the central bank has cut its main lending rate by 425 basis points in order to boost the slowing economy and state-run banks responded to this by reducing rates by 150-200 basis points. State Bank, along with its associates controls a quarter of the Indian bank loans and deposits; on June 24 it reduced its lending rate by 50 basis points. Since November its benchmark lending rate has declined by 200 basis points since November. In November Indian bank loan growth has come down from around 27 percent in to about 15 percent in June and rates have halved to around 30 percent seen in the financial year to March 2008. Bhatt addressed the reporters after he along with other bank chiefs met the central bank governor, D. Subbarao, before a quarterly monetary policy review on July 28. He told in the meeting the main focus was on the current "liquidity overhang" in the system and managing government borrowing without stress. Finance Minister Pranab Mukherjee said in the budget on Monday the fiscal deficit will touch a 16-year high of 6.8 percent of gross domestic product and the government will have to borrow from the market to reduce the shortfall.

Bhatt added commercial banks have requested the Reserve Bank of India (RBI) to extend loan restructuring program till December. Last year the central bank has allowed banks to re-set terms of some loans where they are not receiving repayments regularly, except for real estate and personal, to avoid them from being accounted as non-performing loans in the course of an economic downturn. "We have asked RBI to extend loan restructuring deadline as it is taking lot of time as cases of consortium lending involves multiple banks," Bhatt said. Shares in State Bank, which having a market value of $22 billion, ended down 1.1 percent lower at 1,636.35 rupees in a Mumbai market that rose 0.9 percent.