Sidestepping the Reserve Bank of India’s (RBI’s) tight monetary policy and responding to finance minister P Chidambaram’s initiatives to revive growth, public sector banks have either slashed interest rates or waived processing charges on automobile and home loans to boost demand in the economy.
While the RBI has not eased its grip on money supply in its battle to control inflation raging at more than 7%, the banks under its supervision are using the elbow room available to move ahead.A finance ministry source, who did not wish to be identified, said that Chidambaram was satisfied with the initiatives. At a meeting with chiefs of public sector banks in August, he had nudged them to take "adequate steps and find out ways to reduce interest rates" to push retail loans.
“We are making all attempts to arrest the slowdown in the economy. Apart from fiscal measures, it was important to take monetary measures,” he had said.
Bank of Baroda, Bank of India, Indian Bank, Canara Bank, Allahabad Bank and Central Bank of India are among the lenders that have slashed interest rates for home loans.
The finance ministry, which is keeping a close eye on the development, said in a note “it is expected that this will create substantial demand for the manufacturing sector in the near as well as in the long term.”
The State Bank of India has been using its clout to switch customers from expensive loans in other banks to cheaper ones from its account. This may also release more disposable incomes into spending in the economy.
Manufacturing sector constitutes about 76% of industrial production. Cheaper home loans fan demand for cement, steel and machinery used in buildings, while auto loans can fuel growth in a clutch of engineering and metal industries.
“The government is keen to aid the middle class with the ability to make purchases to boost the economy,” said a finance ministry official.
“Though credit pick up has been mild in the first two quarters, we expect the appetite for it to pick up in the last two quarters,” said TM Bhasin, chairman and managing director, Indian Bank.