Cut interest rate, FM tells banks

House, car loans may become cheaper

Cut interest rate, FM tells banks

Loans and industrial lending may become cheaper if the banks heed the minister’s suggestion.

Mukherjee’s call came at a  daylong meeting of the chief executives of public sector banks here. Immediately after the meeting, State Bank of India (SBI) Chairman O P Bhatt told newspersons that his bank would take a decision on the govt suggestion by month-end.
If the SBI, the country’s largest bank, takes steps to reduce the lending rates,  other public sector banks may follow suit.

Canara Bank and Corporation Bank also echoed Bhatt’s statement on rate cuts. The second largest PSU lender, PNB, however, said its rates are the lowest in the market.
Analysts feel that in view of the Reserve Bank of India (RBI) continuing to adopt a soft monetary policy by reducing key rates, there is space for commercial banks to reduce the lending rates in the range of 50 and 75 basis points.

Currently, interest rates on home loans charged by public sector banks range between 8.5 and 9 per cent for loans up to Rs 20 lakh.

Similarly,  the interest rates on car loan range between 10.75 and 11.5 per cent. And the interest rates charged by the public sector banks on industrial borrowing are between 12 and 13 per cent. But the banks  do charge lesser interest rates on industrial borrowing depending on the credit worthiness of borrowers.

Prime lending rate

If the banks bring down the prime lending rates  (PLR)— which now stands in the range of 12.75-13.25 per cent—by 50 basis points, the lending rates on all sorts of borrowing will come down by 0.5 per cent.

Earlier, Mukherjee, in a move aimed at  providing some relief to the recession-hit industrial sector, said: “As a financial intermediary, the banks have to stand by to provide credit at reasonable rates.”

He wanted the banks to  further soften lending rates. He  regretted that reduction in key rates by the RBI was not adequately reflected in the reduction of PLRs of banks.
Later, he told newspersons: “We cannot tell the banks by how much they should reduce the (lending) rates. All possibilities will be explored.”
Mukherjee told the bankers that “business has to flourish for the economy to prosper. The banks as financial intermediaries have to stand by to provide credit at reasonable rates.”

Between September 2008 and April this year, the RBI reduced key policy rates and also lowered the cash reserve ratio  and statutory liquidity ratio— the funds banks are required to park with the apex bank.

The industry has been complaining that the commercial banks are not proportionately reducing the lending rates despite the RBI softening the monetary policies.
 Industrialists say the lending rate continues to be in double digits. They want it to be brought down to single digit.

Mukherjee also gave a glimpse of the overall state of the Indian economy and said steps taken by the government and RBI had resulted in a 5.8 per cent growth in the last quarter of previous fiscal and 6.7 per cent in the year as a whole.

The minister also assured state-run commercial banks that the government would infuse more funds to ensure that their capital base remained strong and credit flow did not suffer in this regard.

Key points

* Public sector banks show inclination to cut interest rates after govt persuasion
* There is space for commercial banks to reduce the lending rates in the range of 50 and 75 basis points
* If the banks bring down the Prime Lending Rates, which now stands in the range of 12.75-13.25 per cent by 50 basis points, the lending rates on all sorts of borrowing will come down by half per cent.

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