The Telegraph
Since 1st March, 1999
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Rates linked to loan tag

New Delhi, Nov. 18: Finance minister P. Chidambaram today said short-term interest rates on loans for “productive purposes” would remain stable. On the flip side, bankers say there are signs that personal loans could turn costlier.

“The impression that I get is that banks, for the rest of the fiscal, will maintain the current interest rate regime for loans given out for productive purposes,” Chidambaram told newspersons after a meeting with chiefs of public sector banks here.

Loans for “productive purposes” essentially mean those extended for production of goods and services. “This would mean loans granted for installing plant and machinery, import of capital equipment and similar other purposes,” he said.

Housing loans, he said, would “by and large” remain stable. Banking analysts, however, said the finance minister’s unambiguous categorisation of “productive purpose” loans is a clear enough indication that those on other segments such as personal loans and consumer product finances may turn costlier.

SBI chairman A.K. Purwar said yesterday that there was an upward pressure on short-term loans and the bank was closely examining the developments.

Chidambaram said the economy was going through a phase of “investment boom”. “At present, there is an investment boom in the economy. Banks have pointed out that the draw-down of loans sanctioned earlier is taking place now. Therefore, my impression is that public sector banks will maintain the current interest rate regime for loans given out for productive purposes,” he said.

Analysts feel the minister’s remark is addressed at the supply-side of the economy with the government keen to keep inflation under control.

“A rise in lending rates for capital intensive activity would have a direct bearing on the price front by jacking up input prices,” a credit analyst said.

The consolidation exercise in the domestic banking industry will happen as “banks are talking to each other”, Chidambaram said.

“The initiative has to come from the larger banks in particular after taking into confidence the officers’ associations and employees’ unions,” he added.

The finance minister did not envisage any liquidity crisis in the banking system as aggregate deposits have clocked a robust growth of 12.3 per cent in the first half of the current fiscal.

He said banks are in the process of entering into co-finance agreements with state finance corporations (SFCs).

“Sidbi has entered into co-finance agreements with 10 SFCs. Banks can enter into similar agreements where they can provide the working capital loan and SFCs can extend the term loans. Some of these agreements are likely to be signed in the next few days,” he said.

The finance minister appeared satisfied with agri-credit off-take. Against a target of Rs 1,41,000 crore for the current fiscal, banks have, till October 31, lent out Rs 89,354 crore, representing 63 per cent of the targeted figure.

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