FM may ask banks to raise credit, lower interest rates

With economic growth likely to slow down to 8.7 per cent this fiscal, public sector bank heads are expected to come under pressure from Finance Minister P Chidambaram when he meets them on Tuesday to raise lending to the manufacturing sector and cut interest rates.

"Some public sector banks have already reduced interest rates, but other banks should also bring down interest rates considering there is ample liquidity in the system and deposit rates have come down," official sources said.

They said the meeting is likely to focus on "banks' role to meet Budget targets, their performance apart from credit quality and delivery to the target sectors".

The meeting assumes significance as it comes on the heels of the Reserve Bank maintaining status quo in key rates.
The Finance Minister, who met RBI Governor YV Reddy on Saturday, is believed to have discussed measures to moderate the possible rise in capital inflows besides steps to raise credit to the productive sectors and for consumer goods to ensure better GDP figures in the fourth quarter.

According to advance estimates by Central Statistical Organisation, manufacturing output growth is expected to slow down to 9.4 per cent this fiscal against 12 per cent in FY'07.

Among other industrial activities, construction is likely to grow by 9.6 per cent against 12 per cent last fiscal.

These issues are also likely to be raised in the meeting with bank heads.

In his last meeting with the chief executives of public sector banks on January 4, Chidambaram had given a signal that he would prefer lending and deposit rates to move down by 25-50 basis points.

Indications are that the Finance Minister might again try and convince chairmen of these banks to look at reducing interest rates to stimulate both investment and consumption, thereby giving a boost to economic growth.

In his pre-Budget meeting with Congress MPs, the Finance Minister was asked to take effective steps to contain inflation, besides bring down interest rate on home loans by all banks.

Sources said banks may be persuaded to provide a marginal relief on new home loans, especially on loans up to Rs 20 lakh, which constitute nearly 80 per cent of the total housing loan portfolio.

The UPA government's allies have asked the Finance Minister to persuade banks to take effective steps to provide a visible relief to the middle class, besides priority sectors like farm sector, minorities and weaker sections.

Sources said with 2 per cent subvention on farm loans, government has little room to provide relief to farmers except announce a debt relief package, as indicated by Prime Minister Manmohan Singh.

According to CSO estimates, farm and allied sector is likely to witness sluggish growth rate of 2.6 per cent in the current fiscal against 3.8 per cent in 2006-07.

With as many as 10 states going to polls this year, the government does not want to take chances and may impress upon banks to cut rates.