The government on Thursday asked public sector banks to review lending rates to spur credit, although bankers indicated that the scope for further reduction was limited at the moment. After meeting the leading state-owned banks, the Reserve Bank of India (RBI) and industry chambers on Thursday, the Cabinet Secretary KM Chandrasekhar said the stimulus packages are working, though there is shortage of loans in certain sectors. ?We are here in a situation where all of us have to work together and we have to see … to what extent we can bring it (interest rates) down together,? he said.
In a three-hour-long meeting, industry chambers including Confederation of Indian Industry (CII) and Federation of Indian Chamber of Commerce and Industry (FICCI) suggested the interest rates should fall to single-digit levels from the current level of 11-12%. Chandrasekhar said the government has decided to set up a group of industrialists, RBI, Indian Banks Association and the Centre to look into the credit needs of the economy. Details of the group are yet to be finalized.
The government has also asked the RBI to review whether any further relaxation in debt restructuring and provisioning norms was possible. Banking joint secretary Amitabh Verma said, ?Banks have asked RBI to relax the provisioning norms on restructured loans, saying the norm acts as a disincentive. The RBI has also given its own reasoning. We have not asked banks to cut rates. The average interest rate is already 10%. When we talk about interest rates, we should keep in mind the CPI (consumer price index), which is high.?
FICCI President Harsh Pati Singhania said their sample survey showed that banks denied restructuring proposals of nearly 50% of the companies that applied for debt recast. CII said there was a scope for the RBI to cut repo and reverse repo rates by 50 basis points each. The RBI would unveil its review of the monetary policy on April 21. Chandrasekhar said state-run banks had stepped up lending and a growth rate of about 24% in the credit is anticipated this year. Non-food credit of both public and private banks grew at 18% early March year-on-year, the RBI data showed.
Finance Secretary Arun Ramanathan said banks have to examine whether there is scope for reducing interest rates. CMD of a leading state-owned bank, who asked not to be named, said lending rates are unlikely to fall unless deposits rates decline across-the-board and rates on small savings schemes become competitive. He also said that public sector banks have already done there bit in reducing rates, and private banks needed to show similar action.
After RBI cut its short term lending rate by 400 basis points since October, most public sector banks have cut their prime lending rates by 150 basis points.
However, some private banks pared rates by only 50 basis points. Ramanathan said ?private sector banks have their problems? so they could not reduce their lending rates fast enough
Apart from the cabinet secretary, finance secretary and banking joint secretary; RBI deputy governor Usha Thorat, heads of ten public sector banks including State Bank of India, Punjab National Bank, Bank of India, Bank of Baroda and Canara Bank attended the meeting.