NEW DELHI: Finance minister P Chidambaram on Friday said he hoped banks would cut lending and deposit rates by 50 basis points to spur investment and consumption to boost growth.
In a meeting with chief executives of public sector banks, he also asked them to go bullish on the consumer finance segment. While bankers conceded there is a case for softening of rates, they would rather take cues from the monetary policy review slated for later this month.
“I would like, I can’t wish this, that banks cut lending and deposit rates by 50 basis points so that it stimulates investment and consumption,” he told reporters after the quarterly review with chiefs of PSU banks. However, this has to be decided by each bank after factoring in its assets and liabilities, he added.
FM expected rates to be stable and possibly moderate in the medium term if RBI’s monetary policy is supportive. “At least, we should aim for stable interest rates and hope to moderate them in the medium term,” he said. The comments triggered speculation of an interest rate cut by RBI at its policy review on January 29.
Canara Bank chairman MBN Rao, who is also the chief of Indian Banks Association (IBA), said, “Going forward, there could be a case for rates softening. Inflation is at a five-year low and deposit rates have been at a 10-year high. Internationally, too, rates are softening, since one-year dollar deposit is lower than the three-month deposit. Banks have been raising greater amounts of deposits, but are not lending as much. Instead, a lot of the resources mobilised have been invested in government securities.”
“Net interest margins (NIMs) took a slight beating in the first six months of the year. NIMs will do better in a falling interest rate regime. While there is scope to reduce deposit rates, we would wait for the rate signal from RBI,” another banker said. Analysts expect no change in the central bank’s monetary policy stance.
Mr Chidambaram urged bankers to avoid competitive bidding for bulk deposits in this quarter, because there was a huge price to be paid. "Banks should keep cost of money low so that cost of lending can be kept low. Deposits are anyway growing at a satisfactory rate," he said.
He asked banks to step up lending, particularly in the consumer durable and non-durable segments. "I have asked banks to increase lending to investors and consumers of consumer durables and non-consumer durables as there is sluggishness in these two sectors," Mr Chidambaram said.
Taking a cue from the report by the economic advisory council (EAC), he said that banks needed to make more credit available for investment and consumption. There was a need to moderate lending to the real estate sector. So even public sector banks will soon be chasing customers with personal loans.
However, bankers cautioned that lending to the consumer finance segment would require greater due diligence, since some of the private banks accumulated NPAs on this portfolio. Typically, bigger private banks have at least 30% of their portfolio under retail lending, while state-owned banks would have half that exposure in retail.
In a meeting with chief executives of public sector banks, he also asked them to go bullish on the consumer finance segment. While bankers conceded there is a case for softening of rates, they would rather take cues from the monetary policy review slated for later this month.
“I would like, I can’t wish this, that banks cut lending and deposit rates by 50 basis points so that it stimulates investment and consumption,” he told reporters after the quarterly review with chiefs of PSU banks. However, this has to be decided by each bank after factoring in its assets and liabilities, he added.
FM expected rates to be stable and possibly moderate in the medium term if RBI’s monetary policy is supportive. “At least, we should aim for stable interest rates and hope to moderate them in the medium term,” he said. The comments triggered speculation of an interest rate cut by RBI at its policy review on January 29.
Canara Bank chairman MBN Rao, who is also the chief of Indian Banks Association (IBA), said, “Going forward, there could be a case for rates softening. Inflation is at a five-year low and deposit rates have been at a 10-year high. Internationally, too, rates are softening, since one-year dollar deposit is lower than the three-month deposit. Banks have been raising greater amounts of deposits, but are not lending as much. Instead, a lot of the resources mobilised have been invested in government securities.”
“Net interest margins (NIMs) took a slight beating in the first six months of the year. NIMs will do better in a falling interest rate regime. While there is scope to reduce deposit rates, we would wait for the rate signal from RBI,” another banker said. Analysts expect no change in the central bank’s monetary policy stance.
Mr Chidambaram urged bankers to avoid competitive bidding for bulk deposits in this quarter, because there was a huge price to be paid. "Banks should keep cost of money low so that cost of lending can be kept low. Deposits are anyway growing at a satisfactory rate," he said.
He asked banks to step up lending, particularly in the consumer durable and non-durable segments. "I have asked banks to increase lending to investors and consumers of consumer durables and non-consumer durables as there is sluggishness in these two sectors," Mr Chidambaram said.
Taking a cue from the report by the economic advisory council (EAC), he said that banks needed to make more credit available for investment and consumption. There was a need to moderate lending to the real estate sector. So even public sector banks will soon be chasing customers with personal loans.
However, bankers cautioned that lending to the consumer finance segment would require greater due diligence, since some of the private banks accumulated NPAs on this portfolio. Typically, bigger private banks have at least 30% of their portfolio under retail lending, while state-owned banks would have half that exposure in retail.
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