New Delhi: Borrowings are unlikely to rise significantly due to a bleak economic scenario, although banks will cut interest rates further, officials of state-owned banks said after a meeting with acting finance minister Pranab Mukherjee.
Heads of public sector banks, which control about 70% of India’s banking business, usually meet with the finance minister soon after the Reserve Bank of India (RBI) announces its quarterly policy, to take stock of developments.
“We have to concentrate on domestic demand creation,” Mukherjee said after the meet.
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The minister said employment-intensive sectors such as small and medium enterprises would need a boost to enhance demand. Bankers, on their part, said after the meeting that they would look at ways to bring down the cost of credit to employment-intensive sectors. The general cost of lending is set to soften soon, they said.
Corporation Bank chairman J.M. Garg said the bank will cut deposit and retail lending rates from Tuesday. “All the rates are coming down from tomorrow (Tuesday),” Garg said.
O.P. Bhatt, chairman, State Bank of India, India’s largest bank, said it is considering a further reduction in rates. “There is thinking (on these lines),” Bhatt said when asked if there was a possibility of reducing the benchmark prime lending rate, or PLR.
Banks have been cutting rates in the past two months. Punjab National Bank, the second largest public sector bank, cut its PLR by half a percentage point to 11.5% on Friday.
Despite the rate cuts ahead, bankers were pessimistic about the likelihood of a significant increase in credit flow.
According to Allen C.A. Pereira, chairman and managing director, Bank of Maharashtra, lending rates are not the only factor influencing credit growth.
Infrastructural bottlenecks and the economic slowdown also have a bearing on credit growth, he said.
Shubhada Rao, chief economist of private sector Yes Bank Ltd, said she was “broadly in agreement” with factors other than interest rates also affecting credit flow. “Lending rates, along with other factors, have been a dampener on credit growth,” Rao said.
While RBI data on bank credit showed year-on-year growth up to 2 January rose by 24%, bank credit growth in the last month has been stagnant. According to RBI data, total outstanding bank credit on 16 January was Rs26.45 trillion, a shade lower than the outstanding credit of Rs26.44 trillion on 19 December.
“What can banks do when companies do not want to use their line of credit?” asked a senior official of the financial services division of the finance ministry, who didn’t want to be identified.
According to this official, bank credit could not grow fast at the moment in the wake of the economic slowdown.
PTI and Reuters contributed to this story.