Mumbai: The chairman of State Bank of India (SBI), the country’s biggest lender, said on Tuesday that interest rates could harden in six months after falling since last October as demand for credit picks up.
The increase in business activity will result in higher loan growth in the second half of the year, O.P. Bhatt told reporters.
“Six months down the line with credit rising and all the borrowing taking place, rates will either stabilize or even harden,” he said.
“There are lot 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.”
The central bank has cut its main lending rate by 425 basis points since last October to lift a slowing economy and state-run banks have responded by reducing rates by 150-200 basis points. One basis point is one-hundredth of a percentage point.
SBI, which along with its associates controls a quarter of the Indian bank loans and deposits, on 24 June cut its lending rate by 50 basis points. With that, its benchmark lending rate has fallen by 200 basis points since November.
Indian bank loan growth has slowed from around 27% in November to about 15% in June, and halved from rates of around 30% seen in the fiscal year to March 2008.
Bhatt was speaking after he, along with other bank chiefs, met central bank governor D. Subbarao ahead of a quarterly monetary policy review on 28 July.
He said the meet focused 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 would touch a 16-year high of 6.8% of gross domestic product and the government would borrow from the market to bridge the shortfall.
Commercial banks also asked the Reserve Bank of India to extend loan restructuring programme till December, Bhatt said.