Govt asks state-run banks to cut rates

The government on Thursday asked state-owned banks to further cut interest rates in order to give India Inc access to cheaper credit. Some banks, however, retorted by saying that only deserving borrowers would get access to credit.

At a meeting attended by the heads of select public sector banks and industry bodies, Cabinet Secretary K M Chandrasekhar also formed a group to look into issues related to credit delivery.

"We have left with them the message that we are here in a situation where all of us have to work together. And they (public sector banks) have to see what more can be done, to what extent they can bring interest rates down together. They will have a look at it themselves, and they will take a decision based on the economics. Because this has to be related to the deposit rates," Chandrasekhar said after the meeting.

A banker, who was present at the meeting, said that some banks made it clear that banks have to make commercial decisions.

"There is a limit to which we can reduce the deposit rates because of competing investment products such as small savings instruments," said a bank chief. With banks unable to lower deposits rates, lending rates were unlikely to drop significantly.

A banker is said to have talked about the fact that companies that are unable to sustain themselves during the present downturn would face many risks.

Thursday's meeting was attended by about 10 public sector banks, including market leader State Bank of India, Punjab National Bank as well as Canara Bank. The newly formed group, which will meet periodically to address credit-related issues, will have representations from the PSU banks, the Reserve Bank of India, the industry as well as the government.

Before the meeting, K C Chakrabarty, chairman and managing director of PNB, said that there was some scope for reduction in interest rates.

Meanwhile, the industry bodies called for further reduction in lending rates as well as addressing of credit delivery issues.

"Interest rates should be in single-digit. Today, the effective cost to a large borrower is 11 to 12 per cent, while to small and medium enterprises it is more than 15 per cent," said Harsh Pati Singhania, president of Federation of Indian Chambers of Commerce and Industry.

"The government and the central bank should find a way to manage the government borrowing programme so that bond yields do not remain out of line with the fundamentals of the economy. Lending rates should have fallen much faster, given the current weakness in real economic data and the decline in inflation," said Venu Srinivasan, president, Confederation of Indian Industry.

Participants of the meeting did recognise the fact that the public sector banks have been progressively reducing lending rates.

"Generally, what we find is that the banks, during the past few weeks, have reduced their lending rates. Today, their lending rates are the same as what it was in July 2007. Their average rate is even lower at about 10.5 to 11 per cent," Chandrasekhar said.

In addition, it was also recognised that credit growth was comfortable at about 25 per cent during 2008-09. However, it was felt that credit delivery to the small and medium enterprises was an issue.