Need to further cut lending rates for farm, industry

New Delhi, Feb 25 | Updated: Feb 26 2005, 05:37am hrs
The Economic Survey has pitched for further lowering of lending rates to industry and agriculture. It pointed out that there has been a marginal increase of 0.25% in deposit rates. Interest rates on housing loans have firmed up in the current year for the banks. According to the survey, call money rates firmed up from the second half of the year, reflecting lower liquidity on account of large increase in bank credit.

Though the introduction of benchmark prime lending rates (BPLR), based on the actual costs of funds, has addressed the issue of downward rigidity of lending rates, the survey underlined that the widening interest spread showed that further efforts were required to tackle the problem of downward rigidity of lending rates.

The survey also pointed out that there has been a continuous reduction in the non-performing asset (NPA) levels and interest expenditure would enable banks to fix the lending rates on a more realistic basis.

The role of development financial institutions (DFI) has declined and is posing a challenge to banks in meeting the long-term requirement of funds. However, the adherence to Fiscal Resposibility and Budget Management Act (FRBMA) was likely to reduce exposure to government papers and thus release more funds to long-term projects.

New Harvest
Marginal increase of 0.25% in deposit rates
Need to tackle issue of downward rigidity of lending rates
Interest income steady in 2003-04
There has been a steady increase in the net interest income or the interest spread of SCBs. In 2003-04, the spread increased by 19.8% mainly on account of low interest expenditure, as compared to 19.5% in 2002-03. The increase in the spread of private sector and foreign banks was sharper than that of PSBs.

The ratio of spread to total assets had increased for all bank groups in 2003-04.

The ratio was highest for foreign banks at 3.46% followed by PSBs at 2.97%, old private sector banks at 2.6% and the new private sector banks at 1.98%.