Chakrabarty: Reality check
Mumbai, Oct. 5: RBI deputy governor K.C. Chakrabarty today doubted the efficacy of the government’s plan to push cheap loans to boost festival demand for consumer durables and automobiles and said such a move could have an adverse impact on banks’ asset quality.
“You cannot lure people (to buy goods) by lowering interest rates. If interest rate goes up, they will suffer. If they have the requirement of the asset, then only they will pay back,” he told reporters on the sidelines of a conference.
“It is not a very prudent measure to increase consumption by lowering interest rates. If the rate goes up, it will become a non performing asset (NPA),” Chakrabarty told students of a leading business school here earlier.
He referred to the US sub-prime crisis of 2008-09 when a lot of delinquencies were observed in mortgage loans, which led to a global credit crunch.
Asked if it was impractical to implement such a scheme, the deputy governor said yes, adding that there was no such “scheme” as yet.
Chakrabarty wanted to know if banks had the wherewithal to offer such financing given the fact that their credit-to-deposit ratio was around 78 per cent.
When told the scheme involved higher capital infusion by the government, Chakrabarty countered by asking if there were sufficient resources available to carry out the move. “How much (will the government put in)? If the government has so much money, then no problem.”
With a view to stimulating demand, the government is working with the RBI to prod state-run banks to lend at lower rates by increasing capital infusion.
The aim is to prop up financing of consumer durables and two-wheelers, which in turn will lead to better manufacturing output.
Finance minister P. Chidambaram had budgeted Rs 14,000 crore for recapitalising banks this fiscal and had said eligible banks would get the money by September.
Under the new plan, state-run banks lending at lower rates will be compensated by additional capital from the government, over and above the budgeted amount. The move comes in the wake of economic growth falling to a four-year low of 4.4 per cent in the June quarter.