The Hindu Business Line : SBI cost of funds may see a sharp jump

Provisioning for bad loans at Rs 410 crore (compared with a write-back of this provision in the corresponding quarter of the previous fiscal) and provision for depreciation of investments of about Rs 658 crore were major contributors to the below par performance.

Second, the presence of an extraordinary gain of Rs 1,100 crore (on account of the currency gains in the redemption of India Millennium Deposits of $7.1 billion) in the quarter ended December 2005 made the performance look worse.

Remove those extraordinary items and the performance looks better.

The bank's net interest margin has hovered around 3.30 per cent through this year. This will be under pressure in the last quarter considering the recent hikes in deposit rates.

Bank officials had said at the time of their half-yearly results announcement that the bank would not take recourse to bulk deposits (that normally cost between 0.5 percentage point to 1 percentage point more than retail deposits).

Strategy

However, the pressure to raise resources has been fairly high as deposit growth continues to lag behind loan growth. The bank has had to make some adjustments in its strategy during the past fortnight. In a bid to mop up whatever it can, the bank is now offering a rate of 9 per cent for deposits (of Rs 1 lakh and more) for three-year deposits. That is about 2.25 percentage points more than what it was ready to pay a little over a month ago.)

The effect of these fund-raising efforts will begin to kick in over this quarter and probably spill on to the first quarter of the next fiscal. The bank's cost of funds, which has been around 4.5 per cent, could see a sharp jump this quarter.

It appears that the bank will be forced to pass on the increased costs to mid-level corporate and retail borrowers who have contributed to half its loan growth. Another round of lending rate hikes seems on the cards.

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