Click to play videoNew Delhi: In a meeting with the country's top bankers, Finance Minister P Chidambaram on Tuesday said that Government banks must reduce interest rates for loans.
This effectively will means home loan and other consumer loans EMIs could soon cost less.
Chidambaram said the Government had done its bit in bringing more liquidity into the system and now the banks must bring down the cost of credit to keep India's growth going.
“I have impressed upon them that housing and construction sector is an important growth driver,” he said.
PSU banks took the lead from Chidambaram and indicate rate cuts. Sources at the State Bank of India say cuts could come by next week.
Bank of India may also cut its rates by 50 basis points over the next three days. Few others like Punjab National Bank and Union Bank of India have already cut rates.
In fact, markets have reacted positive after FM speech with banking shares rising over seven per cent.
Meanwhile, the State Bank of India Chairman OP Bhatt said that a decision on rate cuts will be taken on Wednesday.
"Liquidity and pricing was also discussed at the meeting. There is consensus that interest rates can be reduced on lending rates. The benchmark should be between 25 basis points and 50 basis points. A decision may be taken tomorrow and would be applicable from Monday (November 10)," Bhatt said.
Here is a verbatim transcript of the FM’s interaction with the media.
Q: Are private-sector banks included in such meetings?
P Chidambaram: The Finance Secretary has called leading private-sector banks tomorrow. The Finance Secretary and the Deputy Governor of the RBI will take that meeting.
Q: Is there a room? Not all the banks are cutting their lending rates.
A: You should ask them. I have impressed upon them that it is not sufficient to create liquidity and provide liquidity. It is important to deliver it a price and at a price at which the credit will actually flow. There are three stages; one is liquidity, the second is price, the third is actual credit delivery. So we have spent a lot of time discussing each of the three stages. So let us wait and see how the banking system responds to the situation that we face.
Q: There are certain banks, which are not very happy to give loans to the industry because their confidence is low.
A: Nobody said that. In a meeting with the Prime Minister where I was present too, nobody said that banks are not lending, what they (the corporates) did say was: banks faced liquidity problems and the pricing also requires to be revisited. Nobody said banks are not willing to lend.
Q: Can you give any timeframe when banks will cut down their lending rates?
A: You are assuming something in that question. Therefore, I refuse to answer that question.
Q: Have you given any directive to banks?
A: I have not given any directive to the banks. I have discussed the economic situation and we have discussed it extensively. I have not given any directive to the banks.
Q: Based on what they have told you, when do you see some action from them?
A: I don’t know. Ask them.
Q: Yesterday, American Express announced job cuts. Is there any danger of this imperative?
A: That has nothing to do with today’s meeting.
Q: The decisions taken by the PSUs will be very encouraging, hopefully?
A: I hope they will be encouraging.
Q: What steps have been taken to shore up dollar liquidity?
A: The RBI has provided a swap facility for which banks can access dollars for their own requirements for their foreign branches and foreign ROs (regional offices) as well as for their important clients. The RBI has also put in place a rather complicated system by which rupee liquidity will be provided followed by dollar liquidity. Banks are very happy. It was after a discussion with the IBA that the system was put in place.
Q: What is the reduction that the borrower can expect?
A: You are assuming something there, so I decline to answer this question.
Q: Is there any need for further monetary measures from the RBI?
A: As I said, when we captured the Liquidity Adjustment Facility (LAF) operation, it is a snapshot. It was only the picture on that day; the picture can change dramatically in three or four days as it did between October 24 and October 31. Therefore we have monitored it on a 24/7 basis. We are in fact monitoring doing it.
Q: Was there any discussion on how to deal with defaults, how to deal with the credit defaults by the housing and construction sector?
A: They (banks) know how to deal with defaults.
Q: Are their NPA levels up?
A: There are no indications that the Non-performance Asset (NPA) levels are up.
Q: Do you get a sense that the bankers risk perception is worsened since last year?
A: Each banker has a different risk perception of each sector. It all depends upon the exposure of that bank to that sector. Therefore I didn’t get the impression that the risk perception has worsened, but I did get the impression that the demand for credit is higher because some other sources of credit have dried up. Therefore, the demand on the public-sector banking system is rather high and the bankers are feeling that pressure: that they have to fill in the gap created by some other credit providers.
Q: You said that some issues are yet to be resolved?
A: One or two issues are to be resolved. There is one issue relating to Non-Performing Asset (NPA) provisioning norms for infrastructure projects, which are delayed on account of court orders for any of the other special circumstances.
The RBI is likely to issue the guidelines by the end of this week. There is another issue, where interest subvention to organic farming by Nabard, or National Bank for Agriculture and Rural Development, where we have said some interest subvention has to be given for those who take to organic farming. That is an issue, which remains to be resolved. There are one or two small issues like that.
Q: You had said that banks have assessed the credit requirement for the SME as well as the housing sector. Given those figures do you see some bottom about pricing on credit delivery?
A: I cannot talk about pricing. I have been assured that the assessment made by SIDBI for the MSME sector and the assessment made by NHB for the housing sector, the net of additional line of credit, which both of them have sought from the RBI. The remaining can be provided by the banking system in the remaining five months of the financial year.
Q: Was there any discussion on capital requirement of banks?
A: I have told each bank to assess its capital requirement with regard to retain earnings, having regard to its capacity under Tier-II, and what additional capital will be required on March 31, 2009 and March 31, 2010 and March 31, 2011. They are supposed to come back to the government. It is our intention to ensure that every bank has a Capital to Risk-Weighted Assets Ratio (CRAR) of 12%. At the moment only five public-sector banks are below 12% but the others will make their assessments.
(With inputs from moneycontrol.com)
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