The government-controlled State Bank of India, the country's biggest lender, expects to increase its loan portfolio in fiscal 2009-10 as its vast and expanding branch network will help it outperform other banks, chairman O P Bhatt told the media in Mumbai.

SBI and its associates control nearly a quarter of Indian bank loans and deposits. Bhatt said the bank plans to open 1000 more branches in the year to March 2010 to add to its 11,000 branches. "We are projecting a growth of 25 per cent during this year," he said, adding that many new branches would be opened in rural areas.

On Monday, SBI extended its concessional home loan and car loan rates up to 30 September. According to Bhatt, it has lent Rs1,350 crore over the first 40 days of the scheme.

Bhatt also said SBI may seek to raise up to Rs400 crore from the market in the next financial year, if the government permits it. He admitted that bank margins are under pressure, as state-run banks have cutting rates under government instructions.

He said that funds mopped up at higher rates between October and December last year, along with lower credit demand, were putting pressure on SBI's net interest margins. ''In the fourth quarter, NIM (net interest margin) would have dropped to around 3 per cent, from 3.16-3.17 per cent earlier. But we are hoping to keep it at around 3 per cent during the current financial year. Any small variation in margins has a large impact on the balance sheet.''

During the third quarter of 2008-09, SBI had launched 1000-day deposits at over 10 per cent, which helped it to raise around Rs1000 crore a day. While the pace has dropped to around Rs500 crore a day, the bank would have to pay higher interest rates for three years, even as lending rates on most of its portfolio subsequently dropped to single-digit levels.

Bhatt said that the average cost of funds was around 6 per cent but, post-September, there was high growth in the cost of incremental funds. ''Sixty to 70 per cent of our lending is at below-BPLR rates as the priority sector loans have to be offered at these levels. In addition, loans to corporates are at market rates and we have ourselves dropped interest rates on home, auto and SME (small and medium enterprise) loans to 8 per cent during the first year. So, BPLR is a technicality,'' Bhatt said.

Since November, SBI has lowered its BPLR by 150 basis points. He, however, added that banks could lower interest rates by 25-50 basis points over the next six months due to low inflation, low demand for credit and sufficient liquidity in the system.

NPAs under control
Asked about the level of non-performing assets, Bhatt said that at the end of March 2009, the bank's bad debts in the domestic loan book would remain at the March 2008 level. However, with foreign regulators seeking higher provisioning, there could be an increase in the overseas loan book.

What would also help SBI and other banks keep NPA levels steady is the Reserve Bank of India's decision to have a second round of debt restructuring and allow these loans to be treated as standard assets, according to Bhatt. ''Both the industry and banks have bought time. If the economy does not improve, then we will have to see how many of the companies come out of it the stress,'' he said.

Bhatt also said that the merger of subsidiaries would depend on the policy of the new government, though most employees at the associate banks were looking forward to a merger with the parent.

'Can't afford new projects'
Bhatt added that SBI was not pursuing overseas acquisitions. ''We are not averse to overseas acquisitions. But unless there is something which offers a strategic fit, we will not look at it very keenly,'' he said.

In an exclusive interview with CNBC-TV18, Bhatt said that SBI is wary of lending to new real estate projects. "We are not lending too much to new projects. We have our existing customers, and if they need any additional restructuring, we are doing that. It's not like we will not disburse any loans to them, but that proposals are also not coming these days."

On whether the 26 per cent stake sale in UTI Asset Management Co could happen before elections, Bhatt said, ''I don't know about elections that whether there is any deadline or otherwise. The UTI management, in consultation with the government, has decided that there is a need to get in a strategic partner, which is in the final lap now. This partner should preferably have strong global presence and should not only give its expertise but also business due to the global connection.

''That, in the long run, would be good for UTI, he added. ''I can't say whether it will happen before or after the elections. It may take even longer, say another two to four months. Though the time the sale might take is uncertain, but it will happen is sure.''

He said SBI is planning to raise Rs60,000-Rs70,000 crore for next five years, of which about Rs5,000-Rs6,000 crore will come via internal accruals. The bank is planning to raise Rs20,000 crore via rights issue to fund its expansion plan for FY10.

In the past also the bank has come out with a rights issue of Rs16,400 crore with a ratio of about 1:5 with an price of about Rs 1,590 per share, of which the government had contributed about Rs10,000 crore. As the government holding is about 60 per cent in the current rights issue, the government is likely to contribute about Rs12,000 crore, which is over and above the Rs20,000 crore that government has set aside for its funding plans for banks to boost their capital adequacy ratio.

Due to the huge fiscal deficit it is quite difficult for this rights issue to pass through and if the market conditions do not improve this will pass the cost of equity higher for the bank. If the rights issue passes through, then the management is expecting about 25 per cent growth in its loan book with its margin at about 3 per cent. If we compare at about current market price the ratio is likely to be about 1:4 with a dilution of about 24 per cenr, and about 30 per cent discount to its current market price the ratio is going to be about 1:3 with a dilution of about 35 per cent.

Bhatt also said SBI would launch 700 branches in this financial year - which is over 50 per cent less than that of last fiscal. Last financial year, the bank had opened 1,600 branches.

Of the 700 branches, many would be opened in rural areas, Bhatt said. Like last year, this year the bank plans to reach out to 50,000 villages where there are no banking operations, he said, adding that "We are happy to raise tier 1 capital."