With consumer demand taking a hit in the slowing economy, Finance Minister P Chidambaram on Wednesday urged public sector banks to cut interest rates.
"We have advised the banks to look at the base rate. In my view, reduction of the base rate will be a powerful booster and will be a powerful stimulus to the credit growth,"
Chidambaram told reporters after meeting the heads of state-run banks.
The Reserve Bank of India cut its key policy rate (repo rate) by 125 basis points in the past year. However, the banks lowered their key lending rate or the base rate by just 50 basis points.
Banks, in the past, have strongly defended their stance saying that a cut in the repo rate has not helped them in lowering their cost of funds and therefore they are not in a position to pass on the benefit to borrowers.
Bankers, although consistently maintained that they would lower lending rates if the RBI reduces cash reserve ratio –– the slice of deposits that banks have to park with the RBI. Banks have also expressed concern that a sharp cut in lending rates could affect their profit margins in the absence of strong domestic demand and impact bank deposits.
However, soon after the finance minister nudged the PSU banks to lower base rates, the Bank of India took the lead and cut base rate by 25 bps. The country’s largest lender State Bank of India resisted saying it already had the lowest lending rate among its peers. The base rate of SBI now is the lowest at 9.70 per cent while most banks have pegged their base rate at 10.50 per cent.
Concerned over rising bad loans, Chidambaram also asked banks to focus on top defaulters and take action against them. Chidambaram said it is the 30 top non-performing accounts which account for bulk of the non-performing assets of banks.
The gross NPAs of some public sector banks, including State Bank of India and Punjab National Bank have crossed 4 per cent of the total assets at the end of March, 2013.
Chidambaram also said that there will be 10,000 more PSU bank branches in the current financial year.