Finance minister P. Chidambaram (right) with M.B.N. Rao (centre), CMD of Canara Bank, and A.K. Khandelwal, CMD of Bank of Baroda, in New Delhi on Friday. Picture by Rajesh Kumar

New Delhi, Jan. 4: Finance minister Palaniappan Chidambaram wants banks to cut lending and deposit rates by 50 basis points, triggering speculation of an interest rate cut by the Reserve Bank of India (RBI) at its policy review on January 29.

“I would like deposit, lending rates to come down by 50 basis points,” Chidambaram told reporters after a meeting with chiefs of state-run banks.

He said: “If monetary policy is supportive, it is possible to look at stable, or perhaps some moderation (of rates) in the medium term.”

Cuts in lending rates will give a fillip to borrowing, pushing up investment and consumption, which in turn will help the economy to sustain high growth.

M.B.N. Rao, chairman of Indian Banks’ Association, said, “With inflation at its five-year low, falling interest rates globally and surplus liquidity with the banks, the interest rates can come down by 0.25-0.50 per cent this quarter.”

The finance minister’s comments led bond yields to ease, with the 10-year bond edging down a point to 7.75 per cent from 7.76 per cent.

Chief executives of banks, who were at the meeting, said they saw interest rates remaining stable during the year.

“At least till April, the rates look stable,” .P. Bhatt, chairman of the State Bank of India, India’s largest commercial bank, said.

Some banks said they might wait till the RBI’s quarterly review of the monetary policy, slated for January 29, before taking any decision on interest rates.

Chidambaram said bank lending had slowed, with annual credit growth at 22.2 per cent on December 7 compared with growth of 30 per cent earlier in 2007.

He said there was a need to moderate lending to the real estate sector and banks needed to make more credit available for investment and consumption.

Chidambaram said he has impressed upon bank chiefs about the need to avoid competitive bidding for bulk deposits.

“You (banks) should keep cost of money low so that cost of lending can be kept low. Deposits are anyway growing at a satisfactory rate,” he said.

Farm credit is growing at a smart clip, and for the financial year 2007-08, the credit will exceed target.

For April-September, farm credit was at Rs 1.20 lakh crore, while gross non-performing assets were at 2.6 per cent. On lending to minorities, Chidambaram said every bank had reported a rise in terms of a proportion of total credit.

“Some have even done 11 per cent and some have done 12. But all of them are moving up. There is not one bank that said it was not able to improve the credit to minorities.”

Financial inclusion

The committee on financial inclusion, headed by C. Rangarajan, chairman of Prime Minister’s economic advisory council, has recommended that individuals should be appointed as banking correspondents.

Currently, only non-government organisations and micro finance institutions can be appointed as banking correspondents.

“The recommendation is that people like ex-servicemen, retired bankers can be appointed as banking correspondents,” the finance minister said.

The committee has suggested that each branch should open at least 250 new accounts each year. Implementation of this recommendation will see the opening of 12.5 million new accounts each year which will boost financial inclusion.