)
Finance Minister P Chidambaram on Tuesday asked state-owned lenders to keep interest rates lower. But, banks are unlikely to go for another rate cut, as high cost of funds and persistently high inflation have limited room for that.
A few public sector banks had recently reduced interest rates on consumer loans after the government promised to infuse additional capital. The banks, however, said further cuts wouldn’t be possible this festival season.
“The finance minister suggested interest rates should go down further but banks have concerns because of high cost of funds,” Punjab & Sind Bank Chairman D P Singh said after a review meeting of bankers with Chidambaram.
Earlier this month, the Reserve Bank of India had reduced the Marginal Standing Facility (MSF) rate 50 basis points to nine per cent to bring down banks’ cost of funds. But lenders say it is still too high to allow further rate cuts. To ensure there was enough liquidity in the system, RBI had also started 7-14-day repo for term cash and open market operations.
Chidambaram asked banks to ensure credit flow to consumer-focused sectors, such as automobile car loans, home loans and consumer goods, was stepped up.
“He has advised us to ensure credit off-take to various sectors… As of now, because of inflationary concerns, there is a feeling that the interest rates may not come down immediately,” said IDBI Bank Chairman M S Raghavan. The Wholesale Price Index-based inflation rate rose to 6.46 per cent in September, from 6.10 per cent in the previous month.
While the government has been asking banks to lower rates, the central bank has yet to show signs of monetary easing. In its last policy review, in September, it had raised the repo rate — the key policy rate at which it lends short-term funds to banks — by 25 basis points; and, it might may go for another hike on October 29.
Indian Bank Chairman T M Bhasin said any further reduction in lending rates would depend on liquidity condition in the market and availability of funds with the banks.
Cheaper loans for consumer goods would help give a push to industrial output and GDP growth. Industrial growth declined to 0.6 per cent in August, from 2.7 per cent the previous month. The rate of economic growth had declined to a one-decade low of five per cent in 2012-13. Besides, the growth crawled to a four-year low of 4.4 per cent in the first quarter of this financial year, prompting independent analysts to peg growth at less than five per cent this year. The government had earmarked Rs 14,000 crore for capital infusion in banks. Now, it is willing to give more, so that banks can lend to these sectors. But even before the funds reached them, banks had started slashing rates.
State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, Syndicate Bank, Andhra Bank, Oriental Bank of Commerce, Indian Overseas Bank, Vijaya Bank and Corporation Bank are some of the lenders that have cut rates on vehicle and consumer-durable loans. The reduction in some cases was as high as five percentage points.
