Lend more at affordable rates: FM

Finance Minister P Chidambaram on Tuesday prodded public sector banks to lend more to housing and consumer durables borrowers at affordable cost to thwart a negative impact on the economy due to a slowdown in the credit growth.

In other words, Chidambaram has given enough indications to all banks to lower interest rates for housing, consumer durables and non-durable products to sustain the economic growth close to 9 per cent.

The latest Index for Industrial Production (IIP) figures show that the consumer durables sector fell by 1.3 per cent in April-December 2007 compared with 11.2 per cent growth in the corresponding period a year ago.

While some banks, including the country's largest lender, State Bank of India, have already responded by cutting prime lending rates (PLRs) by 25 basis points, other public sector lenders are likely to cut lending rates by February 20.

It is expected that banks are likely to lower interest rates for both deposit and lending by 25-50 basis points. Prime lending rates are in the range of 12 to 14 per cent in India.

"The slowdown in credit growth has affected housing and consumer durable sectors. If it (credit) slows down too much, it will affect the economy," Chidambaram said after chairing a pre-Budget meeting with public sector bank chiefs here.

The housing loan growth has declined to 20 per cent in April-November 2007 from 35 per cent in the same period a year ago.

Loans for consumer durables have declined by 4.4 per cent in the period compared with a growth of 11.2 per cent in the year-ago period.

A moderation in the credit growth in 2007-08 could be partly attributed to policy measures such as higher risk weights, provisioning and sensitive sectors and to some extent hardening of interest rates.

The bank credit growth between April and January was 12. 3 per cent as against 17.4 per cent a year ago.

Chidambaram said banks had been advised to look at the loan requirement of home and consumer durable consumers.

"There is a feeling that adequate credit is not flowing to these sectors. Therefore, you must pay attention to it. The government has sensitised banks to the demand of the consuming public," he said.

Many banks, including Punjab National Bank, Union Bank of India and Oriental Bank of Commerce, are likely to take a call on lowering lending and deposit rates shortly.

Meanwhile, public sector banks sought restoration of tax benefits on income from infrastructure lending and tax exemption to contribution towards superannuation funds in the forthcoming Budget.

In a pre-Budget meeting with Finance Minister P Chidambaram on Tuesday, public sector bank chiefs also demanded an increase in the deduction level allowed for contribution towards provident funds and gratuity funds.