The government has asked banks to cut interest rates to boost demand for vehicle and consumer durable loans in the festival season,which it hopes will revive growth in the economy.
Finance Minister P Chidambaram made the announcement within hours of meeting Reserve Bank of India Governor Raghuram Rajan on Thursday.
Some public sector banks can be expected to slash rates by 25 basis points from the current range of 10.5 per cent and above for loans to buy two wheelers,flat panel TVs,high-end mobiles and washing machines. The minister will be meeting the chiefs of these banks soon,it is understood.
Chidambaram said that to support the aggressive credit offers,he would provide additional capital for state-owned banks,but did not specify numbers. The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two wheelers,consumer durables etc. at lower rates in order to stimulate demand, the finance ministry said in a statement.
This would be above the Rs 14,000 crore outlay sanctioned in the Budget for FY 14 for additional capital in these banks,the statement noted.
According to RBI,data bank loans for durables has increased by 10.3 per cent between April and end-August this year. But in terms of the index of industrial production,it has not been corroborated since production of consumer durables goods has witnessed a fall of 12 per cent in the first 4 months of the year.
The measures are meant to keep up this momentum. Money supply in the banking system has tightened after RBI in its mid-quarterly monetary policy review last month chose to raise interest rates by 25 basis points.
Madan Sabnavis,chief economist at Care Ratings said retail loans have less NPA,and are easy to scale up and down. So it makes for good business sense for the government to attempt more credit here.