New Delhi: Loans for companies and individuals are set to become cheaper with India’s state-owned banks promising to cut interest rates by up to 75 basis points after a meeting with the country’s finance minister P. Chidambaram, during which the government unveiled measures to help banks reduce the bad loans on their books and keep them lending to small and medium enterprises, or SMEs.
“Public sector banks have assured me they will deliver credit at an appropriate price, having regard to creditworthiness of borrower and risks involved,” Chidambaram said.
Chidambaram told reporters he had not given a “directive” to reduce rates to the chief executives of public sector banks that account for about 70% of bank credit. However, soon after the meeting with the minister, some of the bankers said they would cut their prime lending rates, or the rate at which they lend to their most creditworthy customers, picking up cues from monetary policy measures announced by the Reserve Bank of India, or RBI, last week.
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Finance secretary Arun Ramanathan has called for a meeting with foreign and private banks on Wednesday.
O.P. Bhatt, chairman and managing director of India’s largest bank, State Bank of India, said his bank would announce a cut in interest rate by up to 50 basis points soon. Heads of other public sector banks such as Indian Bank and Central Bank of India indicated they would do the same. Last week, Punjab National Bank cut its prime lending rate by 50 basis points to 13.50%.
Other bankers said they could consider a cut up to 75 basis points. A basis point is one-hundredth of a percentage point.
“The signal from actions of RBI is clear,” D.K. Joshi, director and principal economist at credit rating agency Crisil Ltd, said.
Over the past few weeks, RBI has cut a key short-term lending rate by 150 basis points to 7.5%, the level which prevailed in January 2007. It has also reduced the cash reserve ratio, which determines the proportion of reserves banks need to keep with RBI, by 350 basis points to 5.5%.
The government said it is continuing discussions with industry body Indian Banks Association (IBA) on the price, or interest rate, at which loans can be given.
Efforts to inject liquidity into the financial system is just the first stage of keeping credit flow to lenders going, Chidambaram said. Public sector banks have been asked to give fortnightly reports on the sectoral flow of credit, he added.
RBI’s monetary policy interventions have been supplemented by the government’s efforts to keep credit flowing to SMEs. Chidambaram identified these companies as employment-intensive part of industry that account for 35% of India’s annual production of goods.
The health of such firms is also critical, analysts say, to the government’s electoral fortunes. Elections to six states are due by the end of the year ahead of parliamentary elections that have to be held by May.
Rate-sensitive: Finance minister P. Chidambaram at a meeting with Indian Banks Association on Tuesday. PTI
Credit guarantee (the facility to borrow without collateral) has been enhanced by 100% to Rs1 crore for SMEs; an institutionalized mechanism to restructure loans of beleaguered companies is to be set up; and Sidbi, or the Small Industries Development Bank of India, has asked RBI for an additional line of credit of Rs10,000 crore.
“Public sector banks stand ready to enhance credit limit for all standard accounts (in the sector),” Chidambaram said.
Infrastructure, one of the focus areas of economic policy design, is also set to get a boost as bad loan guidelines are to be reworked by RBI this week to bring them in line with the challenges faced by companies in the business, he said.
Bankers have been lobbying for easing of bad loan norms of infrastructure projects where work is stalled on account of litigation. This is an extraneous factor that prevents a borrower from servicing its loan and categorizing them as bad loans would increase banks’ provisions and eventually the price of loans, bankers have argued.
In addition, bankers have also requested RBI to relax bad loan norms of real estate loans that have been restructured. In August 2008, RBI specifically tightened bad loan clauses attached to real estate loans that have been restructured or rolled over.
Chidambaram indicated the real estate sector would be a focus area for the government because demand for homes and offices translates into demand for steel and cement that go into building them. “Housing and construction are important growth drivers.”
India’s mortgage market regulator, the National Housing Bank, has asked RBI for a Rs10,000 crore line of credit, which will be used to refinance home loan companies, Chidambaram said.
“It is definitely good news for developers reeling under a credit crisis,” said Sunil Malhotra, chief financial officer of developer Omaxe Ltd.
“If such things are implemented, it will be like a breather for the industry. It will facilitate companies in raising debt.”
Shabana Hussain contributed to this story.