MUMBAI - India's largest lender State Bank of India expects corporate loans to grow at a pace of 14% to 15% this financial year and at about 12% on average over the next two years, a top executive from the bank said on Wednesday.

Demand for corporate loans is being driven by improved capacity utilisation, higher working capital and to a small extent, by a shift in demand from bond markets to bank loans, SBI Managing Director Swaminathan Janakiraman said.

The bank has seen a 21% increase in corporate credit in the July-September quarter.

"Corporate credit picking up is a certainty, but growth rates may moderate as the base rises," Swaminathan told Reuters.

Sectors seeing a pickup range from telecom and power to roads, ports and airports, while lending to non-bank finance companies has also picked up strongly, he said.

As banks start to push lending to companies, some lenders have raised concerns about mispricing of corporate loans with risk inadequately compensated for.

This typically happens when liquidity is ample and demand is low, according to Swaminathan. "With the current opportunities unfolding, tighter liquidity and higher yields, banks can no longer be quoting prices, which are not commensurate with the risk."

Speaking of weak deposit growth being seen across the banking system, Swaminathan said it would require banks to be watchful.

"For a bank like SBI, with a credit-deposit ratio of about 65%, there is enough liquidity available that can be deployed in credit."


While most banks have seen bad loans reduce, lenders may sell some of their legacy soured debt to the government's National Asset Reconstruction Co Ltd (NARCL).

"NARCL has made 14 offers roughly for 200 billion rupees ($2.46 billion) in loans. These sales are in various stages," Swaminathan said. SBI's share in the pool is about 20%.

The bank previously said it was also considering a sale of nearly 10 billion Indian rupees in retail loans to asset reconstruction companies, which according to Swaminathan was yet to materialise.

($1 = 81.2390 Indian rupees)

(Reporting by Ira Dugal; Editing by Shounak Dasgupta)