State Bank of India, the country's largest lender, which last week announced a freeze on home loan rates at 8.0 per cent for a year, is considering further reduction in lending rates.

Speaking after a meeting of public sector banks called by external affairs minister Pranab Mukherjee, who also holds the finance portfolio, SBI chairman O P Bhatt said there is a downward bias for interest rates, at least in the short run.
 
Bhat said he expects interest rates to fall in the short term even as the Reserve Bank of India left its key policy rates unchanged at its quarterly review of monetary policy.

The thinking on these lines follows lukewarm customer response to rate cuts announced by banks over the past few months. Assuming that there is a big fall in demand for capital expenditure by consumers, like buying a house or a vehicle, the existing bank lending rates seem to be on the higher side.

Bhatt said there is a strong possibility of a further reduction in the bank's prime lending rate from the current 12.25 per cent.

SBI had reduced its prime lending rate  from 13 per cent to 12.25 per cent
from 1 January 2009. Bhatt, however, did no indicate the likely extend of reduction in interest rates.

Bhatt also expects a likely increase in banks' non-performing assets both in proportion and absolute terms.

SBI, however, said its third quarter (October-December 2008) net profit rose on the back of robust loan growth and earnings from trading in bonds whose prices jumped as interest rates dropped. SBI's operating income rose 38.3 per cent to Rs21,255.90 crore in Q3 2008-09 over the same quarter in the previous year.

Interest income went up by 42 per cent  to Rs18,030 crore as against Rs12,667 crore in the same quarter a year ago. The bank had a capital adequacy ratio of 13.72 per cent as of end-December 2008.

Treasury income, primarily from trading in bonds and securities, climbed 51.4 per cent to Rs6,004 crore after bond yields tumbled 337 basis points in the quarter as the Reserve Bank of India (RBI) slashed key rates to lift slowing growth. Bond prices move inversely with yield.

Net non-performing assets shrunk to 1.36 per cent during the quarter from 1.44 per cent a year ago. Gross NPAs also contracted to 2.61 per cent  from 2.82 per cent a year ago.