Bank loans could at long last become cheaper. Finance Minister P. Chidambaram today ‘advised’ public sector banks to cut base lending rates. He also asked the banks to focus on the top 30 loan defaulters.
“We have advised the banks to look at the base rate,” Chidambaram told newspersons after meeting the heads of public sector banks and financial institutions. “In my view, reduction of the base rate will be a powerful booster, will be a powerful stimulus to credit growth.”
The base rate is the key to determining the interest rates on deposits and loans, and no bank can lend below that rate. The Finance Minister’s advice comes at a time when the Reserve Bank of India has cut the key policy rate — the repo rate — by 125 basis points (1.25 percentage points), whereas banks have lowered the base rate only by 30-50 basis points.
Banks, however, argue that provisioning requirements and cost of money have gone up by 50 basis points each.
Chidambaram admitted that these two issues could restrict the rate cut, but told newspersons that bank heads had assured him during the meeting that they would review their base lending rates by this month end. Talking about non-performing assets, the Finance Minister asked banks to focus on top defaulters and take action against them. “You focus on the top defaulters as well as keep an eye on the top performing accounts. A close watch is being kept on the top 30 non-performing accounts in each bank and action will be taken on the defaulters,” he said.
For public sector banks, the share of the top 30 accounts in terms of gross non-performing assets (GNPA) rose to 39.7 per cent at end-March 2013, from 34.5 per cent in the corresponding year-ago period.
In fact, for nine public sector banks, this share is more than 50 per cent. GNPA as a percentage of gross advances has gone up to 3.78 per cent from 2.32 per cent.
Business environment
Talking about the overall business environment, the Finance Minister said there was good credit demand from sectors such as agriculture, small and medium enterprises, and retail. In the infrastructure sector, there were signs of higher credit demand from road and non-conventional energy sectors, he said.
“Overall, there seems to be some pick-up in credit demand, I think the picture will become clearer in the second quarter,” he said. Credit growth of public sector banks in 2012-13 declined to 15.6 per cent from 17.8 per cent in the previous year, while deposit growth was 14.9 per cent from 14.4 per cent.