New Delhi, Oct. 3: The government has decided to put more cash in the hands of PSU banks so that they can offer cheap loans to the public to buy auto and consumer durables to stimulate demand during the festival season.
Banks will get additional capital to carry out the cheap loan plan, the finance ministry said after a meeting between finance minister P. Chidambaram and RBI governor Raghuram Rajan.
A reduction in interest rates is likely to drive demand in the festive season and will also benefit lenders, who have been under pressure to hike rates after the central bank raised the repo rate last month.
“While this will bring relief to the consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production,” the finance ministry said in a statement.
“The amount (Rs 14,000 crore provided for capital infusion in the budget) will be enhanced sufficiently. The additional capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two-wheelers and consumer durables at lower rates to stimulate demand,” a finance ministry said.
However, the ministry did not indicate the total sum that would be infused in the state-owned banks.
The interest rates on two-wheeler loans in the country range between 12 per cent and 18 per cent and the tenure varies from two to five years.
The RBI recently cracked down on zero per cent, or discounted interest rate, schemes as it felt the consumers were being fooled into believing that bank funding came for free.
Indications are that the state-owned banks can cut interest rates by a percentage point to boost demand.
“It is a short-term measure and can help to boost demand for consumer durables and the auto sector,” said professor N.R. Bhanumurthy of the National Institute of Public Finance and Policy.
Growth in consumer spending slowed down to 1.6 per cent year-on-year in the first quarter of the fiscal from 4.3 per cent a year earlier, dragging down economic growth for the quarter to a near four-year low of 4.4 per cent.
However, some analysts said banks would be able to lower interest rates only when the RBI cuts key rates. “How can the banks lower interest rates when their cost of funding is high,” they asked.
According to the latest industrial output data, the output of the consumer durables sector declined 9.3 per cent in July from a growth of 0.8 per cent in the year-ago period.