Lowering lending rates will require deposit interest cuts, bankers tell Jaitley

With a half per cent cut in the policy rate since January, the Finance Ministry has sent a signal to banks to lower the lending rates. However, banks say that the rates on small savings are making things difficult for them.

After a review meeting that Finance Minister Arun Jaitley held with chief executives of public sector banks and financial institutions on Wednesday, officials said that bankers told the Government that any cut in lending rates will require lowering the deposit rates.

But “if interest rates on deposits are lowered, then they will become unattractive in comparison with small savings schemes,” an official said, quoting bankers. In such a situation, bank deposits will be in the 7.5-8 per cent range, while small savings schemes earn 8.4-9.2 per cent and come with tax benefits. Only five-year special bank deposits carry tax benefits.

At the meeting, it was also observed that while credit offtake is improving in the agriculture and MSME (micro, small and medium enterprises) sectors, the offtake is slow in large infrastructure sectors. “This needs to be improved,” a senior Government official said. On being asked whether banks were asked to cut lending rates as credit offtake improvement requires lower rates, the official said the issue was discussed and “enough signals (for cutting rates) have been given to banks.”

The Reserve Bank cut policy rates twice by 25 basis points each — first in January and then a day after the Budget. While only two public sector banks — United Bank and Union Bank — cut base rates in January, State Bank of Travancore did so earlier this week. After the meeting, Minister of State for Finance Jayant Sinha hoped that the rate scenario will change soon. “We have a very competitive financial services industry. Once certain banks start to take action, we will see how it unfolds,” he told newspersons.

Later, in a statement issued by the Finance Ministry, Jaitley asked bank chiefs to take commercial decisions without fear or favour as the Centre is committed to providing them financial autonomy in letter and spirit. He also insisted that banks should have strong public grievance redress mechanisms in place so that clients do not have to approach the Government.

Jaitley said adoption of differentiated strategies and capital augmentation plans through innovative financial instruments would allow the banks to meet their capital requirements.

He said that this would also facilitate appropriate credit expansion to meet the needs of the productive sectors of the economy so that the momentum of economic growth may be sustained.