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Banks commit to cut lending rates

Special Correspondent

Outcome of Finance Minister’s meeting

Focus on credit needs of housing and SME sectors
Close watch over liquidity

NEW DELHI: Housing, personal and corporate loan borrowers have something to cheer about amid the global liquidity crisis. With the chiefs of public sector banks committing themselves to consider a cut in their lending rates at a meeting with Union Finance Minister P. Chidambaram here on Tuesday, a lower interest rate regime is set to become a reality.

Briefing journalists, Mr. Chidambaram said: “We have had an extensive discussion and the IBA [Indian Banks Association] on behalf of the banks has assured me that they will reflect on the matter [cut in interest rates] and come up with some decisions on the price at which credit will be delivered to different sectors.”

“I think the discussion on pricing of credit and delivery of credit will lead to some very encouraging decisions by the public sector banks,” Mr. Chidambaram said while noting that the credit needs of housing and small and medium enterprises (SMEs) would also get the attention the sectors deserved.

Almost soon after the meeting, the chiefs of a number of public sector banks including the State Bank of India, the Bank of Baroda and UCO Bank promised to reduce their benchmark lending rates by up to 75 basis points.

Punjab National Bank, having already cut the rates by 50 basis points last week, showed a willingness for further reduction. Union Bank and IDBI Bank have also announced a cut in interest rates by up to 50 basis points.

To ensure that the reduction in interest rates is effected across the entire banking sector, the Finance Ministry will hold a similar interaction on Wednesday with private and foreign banks operating in the country so that issues of liquidity and interest rates are addressed in tandem by players in both the public and private sectors.

“Liquidity not enough”

Mr. Chidambaram stressed that merely providing liquidity was not enough. “I have impressed upon them [PSU banks] that it is not sufficient to create liquidity and provide liquidity. It is important to deliver it at a price at which the credit will actually flow.” In this regard, he stressed the need for meeting the credit requirements of the housing and construction sectors as “they are important growth drivers and in a broad sense account for 50 per cent of growth in most economies.”

“For the housing sector, we have assessed the credit requirement for the next five months and banks have told me that the level of credit disbursement which the NHB [National Housing Bank] has announced can be achieved …We have assessed the credit requirement of the SME sector over the next six months and we think that it can be met,” he said, while referring to the needs of the two sectors.

The NHB and SIDBI [Small Industries Development Bank of India] had each asked for a Rs.10,000-crore line of credit from the Reserve Bank and this was being examined, he said.

However, even as the RBI has taken numerous steps to enhance overall liquidity, “We have to assess liquidity everyday. So this is a continual exercise. RBI will keep a close watch over liquidity.”

Mr. Chidambaram directed the PSU banks to provide fortnightly reports on the flow of credit to various sectors so that action could be taken on a real-time basis.

The Minister noted that most of the decisions taken at the previous review meeting with the PSU banks were implemented, including the one that all jewels pledged under the farm loan scheme be returned if the loans were written off.

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