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As the festival season begins, the finance ministry will provide more capital to public sector banks than Rs 14,000 crore pegged in the Budget for 2013-14 to enable the lenders provide more loans to borrowers in two wheelers, select consumer durables at lower interest rates. The aim is to spur demand for shoring up economic growth, which fell to a four-year low of 4.4% in the first quarter of 2013-14.
The decision in-principle was taken at a meeting between Finance Minister P Chidambaram and RBI governor Raghuram Rajan. Economic affairs secretary Arvind Mayaram was also present on the occasion.
Meanwhile, Pawan Goenka of Mahindra & Mahindra met revenue secretary Sumit Bose to push for reducing tax on sports utility vehicles and lowering interest rates for automobiles.
"The Government has decided in-principle to enhance the amount of capital to be infused into Public Sector Banks (PSBs). In the Budget for 2013-14, a sum of Rs 14,000 crore was provided for capital infusion. This amount will be enhanced sufficiently," the finance ministry said in a statement here after the meeting.
The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two wheelers other consumer durables at lower rates n order to stimulate demand, it added.
"While this will bring relief to the consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," the finance ministry said.
The statement, however, did not give specific figures of the money to be given to the banks for this purpose. Given the fact that fiscal deficit has already touched almost 75% of the Budget Estimate, the ministry will have to walk a tight rope in providing this stimulus.
The meeting discussed the issue of credit growth in different sectors. At the end of September 2013, growth of Gross Bank Credit stood at about 18%, year-on-year.
"However, credit growth is sluggish in some sectors leading to the conclusion that demand in these sectors remains subdued. Based on the discussions, the Government has decided in principle to enhance the amount of capital to be infused into Public Sector Banks," the statement said.
Interestingly, it is the two wheeler segment that has bucked the trend of low sales growth in automobile in September. For example, market leader Hero MotoCorp Ltd sold almost 16% higher vehicles at 468,670 units in September compared to 404,787 a year ago.
Consumer durable production has been witnessing contraction in the current financial year. While the index of industrial production (IIP) rose moderately by 2.6% in July year-on-year, consumer durables output fell 9.3%. In the first four months of the current financial year consumer goods production declined 12%, clearly showing that contraction was much more in earlier months.
