Major banks want the government to make up for losses on small loans to farmers at a concessional rate of 7 per cent.
At a pre-Budget meeting with Finance Minister P Chidambaram, chief executives of major banks, including the State Bank of India, Bank of Baroda, Citibank and HDFC Bank, urged the government to raise the interest rate for small loans or hike the subvention.
The government had asked all banks to issue small loans up to Rs 3 lakh to farmers at a concessional rate following widespread reports of farmers committing suicides in various parts of the country, partly because of the lack of access to low-cost credit.
The government already pays a 2 per cent subsidy on such loans to banks, making their effective rate 9 per cent. However, bankers say that is not enough on small loans, not when the prime lending rate stands at 11 to 12 per cent.
Apart from small loans up to Rs3 lakh, banks are free to set their own deposit and loan rates. While the government's order for setting the interest rate was meant to aid farmers, it came at a time when even public sector banks were moving away from socialistic approach.
At the meeting with Chidambaram, bankers also demanded tax concessions on investment in bank deposits. Interest income from such deposits is taxable, while dividend income from investments in equities is tax-free.
"Why would anyone keep their money in bank deposits?" said a banker. "Unless this is corrected, flow of funds in to banks will not increase." Borrowings from banks by individuals and companies have been growing at around 30 per cent for the past three years.
While banks are allowed to issue bonds to raise money for capital, they cannot do so to fund their loan programmes.
The banks representatives also drew the minister's attention to what they see as an impending liquidity crunch or lack of money in the system.
They suggested allowing banks to reduce their mandatory holding of government bonds, which would, in turn, allow them to divert these funds to loan programmes.
A finance ministry official said many of these issues would have to be addressed by the Reserve Bank of India, and not the ministry. RBI will announce its quarterly monetary policy on January 31.