Govt's cheap loan plan can have adverse effect: RBI deputy governor KC Chakrabarty--ET 05.10.13
MUMBAI: Even as government plans to prop up demand through lower rates of interest for auto and consumer loans, senior-most RBIDeputy Governor K C Chakrabarty today said this can have an adverse impact on their asset quality as "no one can force" lenders to selectively cut rates.
"You cannot lure the people (to buy goods) by lowering interest rates. If interest rate goes up, then 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 NPA," he told students of a leading business school here earlier, alluding to the US sub-prime crisis wherein a lot of delinquencies were observed in mortgage loans which ultimately led to global credit crisis of 2008-09.
Asked if it is impractical to implement such a scheme, the Deputy Governor answered in the affirmative, saying there is no such 'scheme' as yet.
Chakrabarty, known for his candid views, sought to know if banks have the financial might to do such financing given the fact that their credit-to-deposit ratio is hovering at a high 78 per cent.
When told the scheme involves higher capital infusion by the Government, Chakrabarty countered by asking if there are 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 stimulate demand, the Government is working with RBI to prod state-run banks to lend at lower rates by increasing capital infusion. The aim is to prop up consumer durables and two-wheeler financing, which in turn will lead to better manufacturing outputs.
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.
"You cannot lure the people (to buy goods) by lowering interest rates. If interest rate goes up, then 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 NPA," he told students of a leading business school here earlier, alluding to the US sub-prime crisis wherein a lot of delinquencies were observed in mortgage loans which ultimately led to global credit crisis of 2008-09.
Asked if it is impractical to implement such a scheme, the Deputy Governor answered in the affirmative, saying there is no such 'scheme' as yet.
Chakrabarty, known for his candid views, sought to know if banks have the financial might to do such financing given the fact that their credit-to-deposit ratio is hovering at a high 78 per cent.
When told the scheme involves higher capital infusion by the Government, Chakrabarty countered by asking if there are 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 stimulate demand, the Government is working with RBI to prod state-run banks to lend at lower rates by increasing capital infusion. The aim is to prop up consumer durables and two-wheeler financing, which in turn will lead to better manufacturing outputs.
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.
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Banks get more capital to offer cheaper loans for auto, consumer durables-Business Today-03.10.13
The government has decided to enhance capital infusion into the Public Sector (PSU) banks over and above what was provided in the budget to enable them to extend more credit to auto and consumer durables sectors to stimulate demand and combat slowdown.
The decision to increase the quantum of capital infusion was taken at a meeting between Finance Minister P Chidambaram, Reserve Bank of India (RBI) Governor Raghuram Rajan and Economic Affairs Secretary Arvind Mayaram in the national capital.
"This amount (Rs 14,000 crore provided for capital infusion in Budget) will be enhanced sufficiently. The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two-wheeler, consumer durables, etc at lower rates in order to stimulate demand," a finance ministry statement said.
It further said the additional fund infusion would help in combating slowdown and boost output.
"While this will bring relief to consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," it added.
The meeting, which lasted for over an hour, discussed credit growth in different sectors. The quantum of additional capital infusion, however, was not disclosed by the government.
Consumer durables, a reflection of demand for manufactured products, include TV, fridge, washing machine.
According to the latest data, the output of the consumer durables sector declined by 9.3 per cent in July, from a growth of 0.8 per cent in the same month last year. The segment saw a 12 per cent decline in output in April-July compared with growth of 6.1 per cent.
The two-wheeler sales recorded a flat growth of 0.72 per cent in April-August period current fiscal, as against a growth of 6.8 per cent in the corresponding period last year.
"At the end of September 2013, growth of gross bank credit stood at about 18 per cent Y-o-Y basis. However, credit growth is sluggish in some sectors leading to conclusion that demand in this sector remains subdued," the finance ministry's statement said.
"Based on the discussions, government has decided in principle to enhance the amount of capital to be infused in PSU banks," the statement added.
The decision to enhance additional capital infusion comes ahead of the central bank's board meeting on Friday in Raipur, which would be attended by Mayaram and Financial Services Secretary Rajiv Takru, among others.
The RBI board meets at least once every quarter to discuss key economic and financial developments. The four deputy governors are the official directors on the board and two government nominees. There are also 11 non-official directors on RBI board.
The board meet assumes significance in the wake of economic growth falling to a four year low of 4.4 per cent and current account deficit (CAD) at an elevated level of 4.9 per cent in the April-June quarter.
While the government has been emphasising on measures for incentivising growth, the RBI in its policy review last month had hiked interest rates by 0.25 per cent.
The RBI is scheduled to announce its second quarter policy review on October 29.
Although Prime Minister Manmohan Singh and other government functionaries are expecting the growth to improve in the second half of this fiscal, Asian Development Bank in its recent report lowered India's growth projection for 2013-14 to 4.7 per cent.
The economic growth rate slipped to a decade's low level of 5 per cent in 2012-13.
The decision to increase the quantum of capital infusion was taken at a meeting between Finance Minister P Chidambaram, Reserve Bank of India (RBI) Governor Raghuram Rajan and Economic Affairs Secretary Arvind Mayaram in the national capital.
"This amount (Rs 14,000 crore provided for capital infusion in Budget) will be enhanced sufficiently. The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two-wheeler, consumer durables, etc at lower rates in order to stimulate demand," a finance ministry statement said.
It further said the additional fund infusion would help in combating slowdown and boost output.
"While this will bring relief to consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," it added.
The meeting, which lasted for over an hour, discussed credit growth in different sectors. The quantum of additional capital infusion, however, was not disclosed by the government.
Consumer durables, a reflection of demand for manufactured products, include TV, fridge, washing machine.
According to the latest data, the output of the consumer durables sector declined by 9.3 per cent in July, from a growth of 0.8 per cent in the same month last year. The segment saw a 12 per cent decline in output in April-July compared with growth of 6.1 per cent.
The two-wheeler sales recorded a flat growth of 0.72 per cent in April-August period current fiscal, as against a growth of 6.8 per cent in the corresponding period last year.
"At the end of September 2013, growth of gross bank credit stood at about 18 per cent Y-o-Y basis. However, credit growth is sluggish in some sectors leading to conclusion that demand in this sector remains subdued," the finance ministry's statement said.
"Based on the discussions, government has decided in principle to enhance the amount of capital to be infused in PSU banks," the statement added.
The decision to enhance additional capital infusion comes ahead of the central bank's board meeting on Friday in Raipur, which would be attended by Mayaram and Financial Services Secretary Rajiv Takru, among others.
The RBI board meets at least once every quarter to discuss key economic and financial developments. The four deputy governors are the official directors on the board and two government nominees. There are also 11 non-official directors on RBI board.
The board meet assumes significance in the wake of economic growth falling to a four year low of 4.4 per cent and current account deficit (CAD) at an elevated level of 4.9 per cent in the April-June quarter.
While the government has been emphasising on measures for incentivising growth, the RBI in its policy review last month had hiked interest rates by 0.25 per cent.
The RBI is scheduled to announce its second quarter policy review on October 29.
Although Prime Minister Manmohan Singh and other government functionaries are expecting the growth to improve in the second half of this fiscal, Asian Development Bank in its recent report lowered India's growth projection for 2013-14 to 4.7 per cent.
The economic growth rate slipped to a decade's low level of 5 per cent in 2012-13.
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