FM asks govt banks not to hike rates

Finance Minister P Chidambaram advised public sector banks not to raise their lending rates following the increase in cash reserve ratio (CRR) and was particularly concerned about the impact of high interest costs on fast-moving consumer goods (FMCG) and automobile sales.

At a meeting with chairmen and managing directors of public sector banks, Chidambaram asked them not to overprice loans to FMCG and automobile sectors, saying a downturn in these sectors would have a cascading effect on related industries.

The bankers were asked to look at reducing deposit rates instead to protect their margins.

In its quarterly review of the 2007-08 monetary policy on Tuesday, the central bank raised the CRR (the proportion of deposits banks are required to keep with the Reserve Bank of India) to 7 per cent from 6.5 per cent with effect from August 4.

This will lead to an outflow of close to Rs 16,000 crore from the banking system. The earlier CRR hikes had resulted in banks instantly raising their prime lending rates. Banks do not earn any interest on CRR balances, which raises their cost of funds.

The finance minister was concerned that an increase in banks' cost of deposits could result in loans to productive sectors becoming costly and hence asked banks to review their deposit rates. Banks are offering peak rates of 9-9.5 per cent on one-year deposits.

The finance minister also said with headline inflation at 4-4.5 per cent, an interest rate of 9-9.5 per cent on one-year deposits was not justified.

"The finance minister indicated that rates on these deposits should not be more than 8.5 per cent," said the chairman of a large public sector bank.

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