The lower spreads will obviously have an impact on SBI profitability. One of the reasons why tightening spreads have not impacted profits even more drastically so far is that repo rates this year have been much higher. The high repo rate of 8 per cent and, as a consequence, the higher call rates, have led to higher returns, as SBI has traditionally been a lender in the call markets. Yields oncorporate paper too have moved up to around 14 per cent at present for 5-year paper, compared to around 11 per cent for the same paper last year. This has been the reason for the higher returns from treasury operations, together with trading profits on equities and an increase in resources used in treasury operations.

The first half of the year traditionally sees a dip in advances, and slack industrial growth this year has led to most funds being put into investments. This is another reason for the pressure on spreads. During the period April to September 1998, the bank's level of outstanding advances fell from Rs 74237 crore in March-end to Rs 71,391 crore, lower by 3.8 per cent. As of March-end, the level of NPAs, net of provisions, was 6.07 per cent, which works out to Rs 4506 crore. As of September-end, with net NPAs increasing to 6.10 per cent, the NPA figure works out to Rs 4355 crore, lower than what it was as in March-end. This could indicate either higher provisioning or more recoveries. Bad loanprovisions for the half-year have been Rs 335 crore, Rs 225 crore in the first quarter and Rs 110 crore in the second quarter. The first quarter's high provisions are probably a blip caused by one-off factors, such as a large loan going bad.

It was the lower provisioning which was responsible for the marginal rise in net profit by a mere Rs 4.5 crore. What of the future? SBI chairman Verma has said that he will make up in volumes what he will lose on spreads. The second half of the year is normally far better in terms of volumes, because of the traditional "busy" season. In 1997-98, for example, interest earned increased by 12.4 per cent in the second half, compared to the first half.

Operating expenses are slated to increase during the second half. The bank chairman has also warned about increasing NPAs. These factors will affect profits during the second half. Much will, however, depend on interest rates. If the RBI decides to relax its grip on the short end of the market and lowers repo rates,treasury profits will be impacted. There are no signs of that happening so far, however. Higher interest rates will also mean that the bank will not be able to reap the benefit of writing back excess provision for depreciation in investments, which amounted to a huge Rs 964 crore in 1997-98. On the credit side, the bank should be able to make at least a Rs 100 crore from deploying the RIB funds. On balance, however, the risks currently seem to outweigh the positive factors, indicating that the second half will be much tougher for SBI.