State Bank of India (SBI) Chairman O. P. Bhatt on Monday hinted at an increase in interest rates and further said that loan defaults would continue to rise, particularly in the small and medium enterprise (SME) sector, in the next six months.

“Inflation is rising and there are fears that regulatory action may lead to hardening of interest rates,” Mr. Bhatt said at the banking conference (BANCON) here.

The Reserve Bank of India is scheduled to review its annual monetary policy later this month. It is widely anticipated that the apex bank will hike the Cash Reserve Ratio (CRR), the amount banks have to park with it to tighten the money supply.

The expectation of a CRR hike is strengthened by food inflation which is hovering around at around 19 per cent. Referring to a possible rise in defaults, Mr. Bhatt said: “Non-performing assets (NPAs) are rising, especially in the SME sector, and given the lag effect my sense is that it will continue to rise at least in the next two quarters.”

He also said India was likely to maintain an 8 per cent economic growth and it could reach 10 per cent in the later years. On the consolidation in the banking industry, he said it remained a concern owing to its slow pace. Indian banks would have to grow in size and scale, which otherwise, would act as constrain for local lenders to compete with their global peers.

On SBI’s consolidation process, Mr. Bhatt said the process was happening at a slow pace.

“We started the process of consolidation, but it is going a bit slow,” Mr. Bhatt observed.

Whether Indian banks would be able to find adequate fund to finance the fund-starved core sector also remained a challenge, Mr. Bhatt said. The government estimated an investment of $500 billion to develop ports, roads and airports over the next five years. Also, banks would have to fine tune their risk management mechanism in face of the challenging market conditions, he said.

Mr. Bhatt said the centre of economic activities was slowly but surely shifting towards East, particular India and China, and global investors were increasingly focussing on India. He said given the strong fundamentals of the economy, bank credit, over the next three to five years was expected to grow by 20-25 per cent for the industry.

SBI, which had set a credit growth target of 25 per cent in the beginning of this fiscal, however, lowered its target to 16-18 per cent given a slow credit off-take.
NPAs may escalate. Indian Overseas Bank on Monday said it had seen a rise in its bad loans in the quarter ended December 30 but expected the level of non-performing assets (NPAs) to stabilise in the January-March quarter.