UPDATE 1-India's SBI cuts lending rate, plans to raise funds

(Adds details, quotes)

By V. Ramakrishnan and Kaustav Roy

MUMBAI, Nov 6 (Reuters) - State Bank of India (SBI.BO), the country's biggest lender, is cutting its main lending rate by 75 basis points and will raise $1-$2 billion this year to help tide over tight liquidity conditions, its chairman said on Thursday.

O. P. Bhatt said a lack of liquidity was a big issue in country's banking system, and also said the sector's bad loans would rise because of the stress in the economy.

"In India we don't have the problem of a lack of trust between banks and financial institutions, but we do have a problem of lack of liquidity," he said.

"There is not enough liquidity in the system for money to flow from one bank to another, or from one bank to a customer," he said.

Tight cash conditions last month forced some Indian banks to borrow at exorbitant interest rates and froze money markets, prompting policy makers to unveil a slew of measures including cuts to rates and banks' reserve requirements to free up funds.

The central bank slashed it main short-term lending rate by 150 basis points in two moves on Oct. 20 and Nov 1.

SBI said it would cut its prime lending rate to 13.0 percent from 13.75 percent from Nov. 10, and said it would reduce deposit rates by smaller amounts from Dec. 1.

Earlier this week, after a meeting with finance minister Palaniappan Chidambaram, state-run banks had agreed to follow the central bank's lead and cut lending rates.

Bhatt said there would be further pressure on liquidity as some funding avenues, such as offshore loans and foreign direct investment, had dried up or been largely reduced.

"So my concern is it is possible that in the next week, next month, all these things together may put a huge amount of pressure on liquidity," Bhatt said

"As long as the authorities are aware, as long as they are proactive about it, I don't see any difficulty in their managing liquidity positively," he said.

Policy makers around the world have slashed interest rates in recent weeks and injected huge amounts into their banking systems to combat the spillover effects of the global financial crisis. (Writing by Prashant Mehra; Editing by John Mair)