Mumbai: Indian banks, wrestling with the highest borrowing costs in six-and-a-half years, will earn less from each loan, spurring a switch to mutual funds and insurance, said Om Prakash Bhatt, chairman of State Bank of India (SBI), the nation’s biggest lender.
The difference between the interest earned from loans and the amount paid to depositors will narrow to as little as 2.5 percentage points in three years from 3 percentage points now, Bhatt said in an interview. Loan growth may be curbed by further increases in borrowing costs by the central bank, he said.
“There’s going to be stress on assets across the banking industry,” Bhatt, 57, said on 27 June in his office in SBI’s Mumbai headquarters. “Every time they raise the benchmark rate, the stress goes up.”
SBI needs alternative revenue as nine increases in the Reserve Bank of India’s benchmark interest rate in two-and-a-half years and the fastest pace of inflation in 13 years deters companies from borrowing. Bhatt said he’ll mirror overseas banks including Citigroup Inc., which get as much as 85% of revenue from non-interest income, compared with SBI’s 15%.
“When the economic cycle turns, banks will have to undergo pain,” said S. Amarnath, regional head at Religare Securities Ltd. “The postponement of expansion by companies when interest rates rise and rising cost of funds will all hurt banks.”
SBI dropped 4.3% to Rs1,111.60 in Mumbai trading on Monday. The stock, down 50% this year, is headed for its worst annual performance since at least 1992. SBI, 60% owned by the government, is targeting 40% growth in non-interest income for the 12 months to 31 March 2009, compared with 28% in the previous year, Bhatt said. Sales of mutual funds and insurance products may quadruple this year after doubling in the previous 12 months, he said.
“The net interest income as a ratio of total income is going down world over,” Bhatt said. “For your survival, you need to increase the ratio of fees income to interest income.”
SBI, which in February lowered its prime lending rate twice to 12.25% under pressure from the government to boost loans and drive economic growth, on 26 June raised the rate it charges its best customers for the first time in 15 months, to 12.75%. Deposit rates will be increased by as much as 0.75 percentage point from Monday.