The State Bank of India (SBI) has decided to slash interest rates and waive penalty on loans to revive corporates which are facing the brunt of the economic slowdown.
"This special short-term dispensation is aimed only at those corporates facing difficulties due to the slowdown," chairman Janaki Ballabh said at a seminar on "Emerging Financial Sector Paradigm" organised by the Federation of Indian Chambers of Commerce and Industry.
The industrial sectors eligible for the package, among others, include steel, textiles, chemicals, hotels and commercial vehicles. Only those accounts which were classified as "standard" as on March 31, 2001 but subsequently became "sub-standard" due to economic and sectoral slowdown will be given assistance, said Ballabh.
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The special dispensation will be operative only for one to two years, said Ballabh adding, "and not beyond December 31, 2003". SBI is also asking consortium banks to adopt a similar relief package, he stated.
However, willful defaulters and units whose profitability has been hit by outdated technology cannot avail of this scheme.
HDFC chairman Deepak Parekh said there was a strong inter-linkage between the four main sectors of the economy - real, fiscal, financial and external. "Weakness in one sector can render reforms in other sectors ineffective," he said.
Further, Parekh said the country's real interest rates at 7 to 8 per cent was among the highest in the world. This rate was high primarily because of continuing large fiscal deficits.
"In the face of a decline in the credit demand, banks are investing heavily in government securities instead of reducing interest rates substantially," Parekh said. He attributed the banks investments in gilts and their shying away from lending to their bitter experience with sticky assets and also to meet capital adequacy norms.
Parekh suggested that the Reserve Bank of India should remove the 4.5 per cent savings account rate, which effectively acts as a floor and allow banks the flexibility to pay as little as they like to keep off deposits that they do not like.
Indian Banks' Association (IBA) chairman, Dalbir Singh dubbed the clamour of the corporates for lower interest rates as "unreasonable".
"How can we lend at interest rates below our cost? Borrowers desire lower rates but must not the depositors also be protected?" Singh, who is also the chairman and managing director (CMD) of the Central Bank of India, asked.
He cautioned that reducing interest rates on deposits would have a significant impact on the depositors standard of living.