Centre sends out 11.5% rate signal

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New Delhi, Nov 13: 11.5%- that’s the benchmark around which the Centre would like banks to set their prime lending rate, down from the current range of 12.75-14%, to bring down the cost of scarce capital for Indian industry. A clear signal to this effect is that the finance ministry has, in an office memorandum issued last week, left interest rates on central government loans to states, public sector entities and public financial institutions unchanged from last year.

While loans to financial institutions like Rural Electrification Corporation and National Bank for Agriculture & Rural Development (Nabard) will be available at 10% interest, the ministry has pegged the interest on investment loans to PSUs at 11.50%. The department of economic affairs revises the interest rates applicable on such loans annually.

Though the Centre doesn’t normally give out loans to the private sector, in exceptional cases, ‘where such loans become necessary’, it lends at an interest rate that is 50 basis points higher than what is charged from public sector enterprises. This means that if a private sector entity got a GoI loan, it may have to pay no more than 12% for investment loans and 15% for working capital credit—far less than what is charged by banks.

Apart from maintaining its lending rates, the Centre has also made it clear that there is no question of increasing the returns on small savings schemes—as demanded by many to counter the high inflation and match the double-digit returns on risk-free bank deposits.

In another resolution, the finance ministry has set the interest rate to be credited on the accumulations of all central and state government employees in the general provident fund (GPF) for 2008-09 at 8%. The GPF rate is the benchmark for small savings schemes like the public provident fund and national savings certificates.

This would also make it difficult for the country’s largest retirement fund, the Employees’ Provident Fund Organisation (EPFO), to declare a PF rate higher than the 8.5% paid in 2007-08. EPFO has been demanding a hike in the interest paid on the special deposit scheme (SDS), where it has over Rs 53,000 crore parked, from the current 8%. But the finance ministry is unlikely to hike the SDS rate beyond the GPF rate.

Setting the limits

•Finmin leaves interest rates on loans to states unchanged

•Ministry sets rate of 8% on accumulations in GPF for the fiscal