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Interest rates to remain attractive: Chidambaram

Govt said interest rates will remain attractive and the RBI would address the issue of shortage of lendable money in the system.

india Updated: Mar 31, 2006 16:18 IST
Press Trust of India
Press Trust of India

Government said on Thursday that interest rates will remain attractive to depositors as well as borrowers and the Reserve Bank would address the issue of shortage of lendable money in the system.

"These (hardening or softening of interest rates) are value judgements. All I can say is that interest rates will remain attractive to both depositors and borrowers," Finance Minister P Chidambaram told reporters on the sidelines of a Punjab National Bank function.

Higher interest rates reflect increase in demand for credit in the economy, Chidambaram said adding, "no one in the government can say rising credit demand is bad or too much."

Pointing out that the demand for credit reflects the need of different sectors of the economy, the Finance Minister said the issue that is to be addressed is the supply side of the credit.

"And RBI is seized of the issue (of liquidity). I am totally confident that RBI will address the issue of supply side of the credit," he said.

Pointing out that RBI has already taken first step to tackle liquidity by allowing banks to raise NRI deposit rates by 25 basis points, he said Reserve Bank Governor YV Reddy is a competent person to tackle the issue of credit shortage.

Earlier this week, RBI had permitted banks to offer London Inter-Bank Offered Rates on dollar deposits of NRIs, called FCNR deposits.

The banks till then could offer these rates at 25 basis points below LIBOR.

The central bank is scheduled to announce its quarterly monetary review on April 18.

RBI took the step after a five-member bankers delegation discussed the issue of credit shortage with the central bank Governor.

The meeting followed similar deliberations between PSU banks' chairmen with the finance minister last week.

Raising of NRI deposit rates was one of the suggestions by the Indian Banks' Association.

The other suggestions included utilising excess statutory liquidity ratio and reducing cash reserve ratio.

Pointing out that a balance has to be struck between the demand of depositors and borrowers, Chidambaram said at the function that the supply of credit must be enhanced to increase the investment rate for sustaining high growth rate, which the economy has been witnessing since the third quarter of 2004-05.

Admitting that there is a mismatch between demand and supply of credit, he said deposits have grown at the rate of 16 per cent this fiscal so far, while the lending growth has been 30 per cent.

He said ways and means have to be found to bridge this gap and keep up the investment rate to continue high growth rate.

The finance minister pointed out that the banking system finances 35 per cent of GDP in India against over 70 per cent in developed countries.

Over 50 per cent of farm families do not have access to credit, while 20 per cent of them take the credit from non- institutional framework, he added.

He expressed the hope that farm credit by banks would cross the target of Rs 1,42,000 crore this fiscal and Rs 1,75,000 crore during 2006-07.

The Finance Minister said self help groups are being linked to the banking sector to provide micro finance even in Bihar and West Bengal.

Exhorting banks to improve quality of credit, Chidambaram expressed hope that they will raise more money from the market after the recent guidelines by the Reserve Bank on hybrid loans.

To a question, he denied that banks were asking collaterals for education loans up to Rs four lakh.

Only the student's parents are required to sign the loan application for amounts up to Rs four lakh and there was no need for collaterals, he said.

Chidambaram said 1,76,000 education loans were given till December, 2005-06, and hoped that two lakh students would be given credit during this fiscal.

He assured the banks that students will pay back their loans. "One or two students may not pay back. But others will pay back," he said.

The function was organised to mark the 2000th centralised banking branch of PNB. The PSU nk has linked 1000 branches to its centralised network in a year's time.

First Published: Mar 31, 2006 16:18 IST