Nov. 6 (Bloomberg) -- State Bank of India, which announced a cut in its lending rate today, said credit growth is unlikely to slow in the fiscal second half, requiring the government and the central bank to ensure adequate cash in the financial system.

Loan growth in the six months ending March 31 is expected to match the 29 percent increase in the first half, State Bank of India Chairman Om Prakash Bhatt said in Mumbai today. The nation's biggest bank will cut its lending rate by 0.75 percentage point to 13 percent effective Nov. 10.

India has said it will make sure loans are available to companies as turmoil in the global financial markets leads to a credit freeze. State-run banks were facing increased credit demands as other loan sources had dried up, Finance Minister Palaniappan Chidambaram said on Nov. 4.

``There is no problem of liquidity at this point of time,'' Bhatt told reporters in Mumbai. ``There is going to be some pressure on liquidity next month as it's a time when typically the busy season starts and government borrowings increase.''

Bhatt, who expects bad loans to rise, said Indian banks need more capital to meet lending requirements and he expects more measures to boost long-term liquidity. Bhatt described the bad loans concern as ``moderate'' and said the bank plans to raise as much as 100 billion rupees ($2.1 billion) through subordinated bonds by December.

No Mismatch

The chairman said there was no mismatch between loans and deposits. ``Our credit-deposit ratio is 74 percent,'' he said.

While State Bank hasn't stopped lending to any sector of the economy, deposits have been growing at 10 billion rupees a day for the past two months, he said.

About 29 percent of State Bank's deposits are held in Indian government bonds and Bhatt said he's ``comfortable'' with the bank's sovereign debt portfolio. The bank has dropped 46 percent in Mumbai trading this year, less than the 52 percent drop in the benchmark Sensitive Index. State Bank fell 4.4 percent today to 1,216.7 rupees in Mumbai.

Indian banks need liquidity to sustain growth, said Chanda Kochhar, joint managing director at ICICI Bank Ltd., India's second-biggest lender. Indian banks need liquidity to fill the fund-raising gap, she said in Mumbai today.

State Bank's move to cut the lending rate follows central bank action. The Reserve Bank of India cut the amount lenders must set aside as reserves to 5.5 percent from 6.5 percent on Nov. 1, reduced the amount lenders are required to keep in government bonds to 24 percent from 25 percent and lowered the repurchase rate to 7.5 percent from 8 percent.

Central Bank Action

The central bank deployed all three of its main tools to boost growth for the first time in more than a decade after inter-bank lending rates climbed to 19.5 percent on Oct. 31, the highest closing this year.

Other state-run banks including Allahabad Bank, Andhra Bank, Bank of Baroda, Central Bank of India, Corporation Bank and Indian Overseas Bank cut the lending rate by 75 basis points each. Citigroup Inc. cut its lending rate for top-rated clients in India by half a percentage point.

Chidambaram had told state-run banks to ensure interest rates are lowered enough to free up the flow of credit to companies in Asia's third-biggest economy.

State Bank, which posted 40 percent higher profit in the second quarter to Sept. 30, set aside 6.1 billion rupees for contingencies, including delinquencies on loans, more than seven times the 857 million rupees made in provisions a year earlier. Bad debt as a ratio of loans fell to 2.51 percent as of Sept. 30 from 2.54 percent in June, the bank said on Oct. 27.

ICICI Bank and other non-state banks have also pledged to review their interest rates, the finance ministry has said.

To contact the reporter on this story: Sumit Sharma in Mumbai at sumitsharma@bloomberg.net.

Last Updated: November 6, 2008 07:27 EST