By Tamajit Pain

KOLKATA (Reuters) - India's top lender, State Bank of India (SBI.BO: Quote, Profile, Research), posted a better-than-expected 26 percent rise in quarterly net profit as access to low cost funds helped cushion tighter margins and nudged its shares up more than 3 percent.

The state-run bank, which raised $4.1 billion in a rights issue in March, said it expected only a slightly faster pace of loan growth as interest rates at near 5-1/2-year highs rein in runaway inflation and curb demand.

"Strong push in retail loans has led to growth ... We are aiming at 25 percent growth in advances in FY08/09 as against RBI's expectation of 20 percent growth," Chairman O.P. Bhatt said at a news conference, referring to the Reserve Bank of India.

State Bank, which controls 23 percent of India's banking business along with its associates, said loans grew 23.4 percent in the fiscal year to March, slowing from 30 percent a year ago.

Last month closest rival ICICI Bank (ICBK.BO: Quote, Profile, Research), which posted a forecast-beating 39 percent rise in quarterly profit, said it did not expect to better the 15 percent loan growth achieved in 2007/08 as it was tightening higher-risk retail lending.

State Bank, which has 10,000 branches and 200,000 employees, said net profit in January-March, its fiscal fourth quarter, rose to 18.83 billion rupees ($462 million) from 14.93 billion rupees a year earlier.

That beat a Reuters poll forecast of 16.9 billion rupees.

Earnings could come under pressure this year after the central bank last month raised the proportion of deposits that banks must set aside by 75 basis points to a seven-year high of 8.25 percent.