In an unprecedented move, the Finance Ministry has asked banks to specifically indicate the extent to which they can cut lending rates to select sectors, such as two-wheelers and consumer durables.
Public sector banks (PSBs) will also have to give the Ministry details of the size of their retail lending portfolio and its growth rate in recent years.
The Centre is also keen that banks lend up to ten times the funding they receive from the Government by way of additional capital to pump-prime the economy.
PSBs have been asked to estimate and indicate the additional capital they will need to achieve a 1:10 capital-to-advances ration for these sectors.
A communication to this effect has been sent by the Department of Financial Services in the Finance Ministry to all banks, sources in the banking industry said.
PSBs have to furnish information on the quantum of possible interest rate cuts for loans for cars, light and heavy commercial vehicles, two-wheelers, refrigerators, air-conditioners, televisions and washing machines.
Lending rates for vehicles and consumer durables vary across banks, but are mostly higher than the base rate, which is the rate below which banks cannot lend. The Government had earlier this month (October 3) announced that it was willing to infuse more capital into PSBs this fiscal than what it had budgeted for. Against this additional capital, the PSBs would be required to lend at lower rates for purchase of consumer durables and two-wheelers.
IBA study
An analysis by the Indian Banks’ Association has thrown up interesting trends regarding sales of vehicles and consumer goods. Year-on-year, in August, sales of vehicles and consumer durables were low or in the negative. While car sales contracted 20 per cent, light and commercial vehicle sales declined 31 per cent year-on-year in August.
Two-wheeler sales grew 5 per cent. While sales of refrigerators/air-conditioners grew 6 per cent, television sales contracted 27 per cent. Washing machine sales were up 11 per cent.
Sceptics of the strategy of banks offering cheaper consumer loans on the back of additional capital contend that people cannot be lured into buying consumer durables and vehicles by lowering the interest rates.
There are also doubts about the Government’s ability to infuse capital in addition to the Rs 14,000 crore already promised this fiscal.