Having energised market regulator SEBI to take swift decisions to pep up mutual funds and other market segments a couple of days ago, Finance Minister P. Chidambaram, who is on a mission mode to arrest the economic slowdown, on Saturday directed public sector banks to cut interest rates and provide cheaper credit at lower EMIs (equated monthly instalments) to consumers so as to induce spending on durable goods, kick-start the manufacturing growth engines and help revive investment across the board.
At a review meeting of public sector banks (PSBs) and financial institutions, which found the health of the banking sector as “extremely good”,
Mr. Chidambaram also asked the chief executives to reschedule the short-term loans to farmers in drought-affected States to long-erm debt in view of the deficient monsoon and called for revision in sanction norms of education loans to ensure that eligible students are not turned back.
Alongside, in a bid to ensure that the surplus cash available with the people gets channelised into the banking system, the Finance Minister directed the PSB chiefs to double the number of ATMs (automated teller machines) in two years from the current 63,000 and also provide the facility of cash acceptance so that the funds do not lie idle in the hands of the people.
Briefing reporters on the outcome of his meeting with the PSB chiefs, Mr. Chidambaram said: “Most of our problems will be over if we revive investment. Investment must be revived across the board — small, medium and large industries. Sentiment is only one factor. Sentiment will change if the other issues are addressed.”
Step-by-step approach
Dealing with the aspects of slowdown in a step-by-step approach, Mr. Chidambaram maintained that the EMIs on consumer loans should be pegged at affordable levels. “The middle-class is complaining about increasing EMIs and stretching payment cycle. The middle-class, which consumes consumer durables [is] postponing purchases, and that is not good for the industry,” he said and argued that just as investment plans must be brought forward, consumers must be encouraged to buy consumer durables to keep the manufacturing engine running.
“The EMI must be kept at affordable level so that people will buy two wheelers, cars, refrigerators, washing machines, cooking ranges, mixies and grinders…That will keep the engine of manufacturing going and large industries continue to produce these goods. The suppliers of parts and accessories in the small and medium enterprises will continue to do business.” Mr. Chidambaram said.
In this regard, the Finance Minister cited the specific example highlighted by the State Bank of India (SBI), which showed that the sale of cars picked up significantly on reduction of EMIs. As per the bank’s experience, SBI was selling — providing loans for purchase of — 400 cars a day when the EMI was Rs.1,766 per lakh per month for seven-year loans. The sales jumped to 700 cars per day when the EMI was brought down to Rs.1,725. It shot up further to 1,200 cars, once the EMI was further reduced to Rs.1,699. “I have urged the other banks to look at [the] SBI example…the point is well taken,” Mr. Chidambaram said.
Mr. Chidambaram admitted that there had been a certain amount of choking in supply of credit to banks. He noted that the bank chairmen were candid in identifying a number of issues such as uncertainty in fuel supply agreements, delay in clearances and approvals, land acquisition and other government entities such as NHAI and SEBs not making payment in time. “These are issues which have been identified as inhibiting. I will take up the issues with ministries concerned. Once we get the investment cycle going, once we get the investment engine started, many of our problems can be solved. We have asked the banks to focus on sectors that deserve credit,” he said.
Credit crunch
A part of the credit crunch could possibly be met through an increase in deposits. Mr. Chidambaram pointed out that about Rs.11 lakh crore in cash is estimated to remain with the people which must come into the banking system and this could be done by increasing the number of ATMs. “People must take to banking...Something like Rs.11 lakh crore lies as cash in hands of people. That Rs.11 lakh crore money should not lie in hands of people, it should lie in banks.”
Mr. Chidambaram argued that more people would take to banking if there are more branches and facility to draw money whenever needed and also put it back when they do not require it.
“Now banks have been advised to quickly upgrade their ATMs to not only cash disbursing machines, but also cash accepting machines,” he said while pointing out that the Indian Banks’ Association (IBA) would soon launch a campaign to encourage e-transaction.
Turning to the farm loan sector in view of the deficient monsoon, Mr. Chidambaram said banks were prepared to tackle the situation and credit would be made available to farmers for sowing of alternate crops in October. Bank loans to the farm sector this fiscal, he said, would about Rs.6 lakh crore and banks have already issued 11.5 crore Kisan Credit Cards (KCC) to farmers. While about 60 per cent of the loans are provided to farmers at four per cent, the banks were getting repayment of loans and there were no concerns of NPAs (non-performing assets).
As for the housing sector problems, Mr. Chidambaram said that the IBA has been told to set up a small group to look into the vexed issues which involved high demand for houses even as there are vacant flats and unfinished buildings.
Referring to education loans, the Finance Minister said that in the next few days, the IBA would soon come out with a revised circular to advise banks that no child fulfilling the prescribed parameters is denied a loan. “Education loan is right of every student,” he said and warned that action would be taken against bank officers who deny loans to deserving students.
Keywords: Union Finance Minister P. Chidambaram, Indian economy, economic growth, banking sector, public sector banks
Well done FM! You have just laid the foundations for the next sub-prime credit crisis!
How does doubling ATM's ensures people will park their funds in banks? More precisely, when you cannot withdraw more than 5 times, would people still park all their idle funds in ATM's! How does it improve the economy? the idle funds with people will not be idle at the ATM's!
EMI"S to buy consumer durables! Consumer durables are increasingly imported by China and wonder how it will boost Indian economy! As Mr. Subramanian pointed out in the comments, the wisdom of State Bank derived from their experience with Car loans is totally inconvincing!
To my knowledge, the total number of Automated Teller Machines (ATMs) set up by all types of banks in India is around 90,000 as on date and not 63,000 as reported in the above article. The aggregate number of ATMs are almost on par with the total number of branches. Banks in India have been rapidly increasing their services in the past few years by introducing a variety of ATMs besides opening of branches in Rural/Semi-Urban/Urban/Metro areas. I could count these as On-site, Off-site, Mobile, Bio-metric, Solar-based, White / Brown Labelled, Micro ATMs, etc. Retail Banking has gained momentum at least seven or eight years back coupled with use of technology in a big way.
“Education loan is right of every student,” finance minister said and warned that action would be taken against bank officers who deny loans to deserving students. it will be good for student.
While lot of reforms are required in the banking sector to make things costomer friendly , which the FM has looked into .. about edu. loans ..while norms to get the loan can be made easier ... at the same time a more stricter machanism should be in place to get the money back.... This will give a sense of satisfaction/responsibility for the banking staff who operate as well as the borrower.
More serious matters demand the urgent attention of our FM.
Credit availability and low interest rate is not at all solution.The confidence of the people to go for credit is vital for the economy. The increase of car sales through SBI is not an indicator in the past. What about recurring expenses of petrol price?The confidence of the middle class on economy decides credit.Make the goods available at reasonable rates .Divert the economy of the corporates to long term profits from short term gains.Create confidence in the minds of the middle class on the government for their economy.If tomorrow is not certain how will they go for credit whatever be the rate of interest. The reach out of bank to the people is excellent.Still millions of people do not go for credit to banks.Yes savings is our way of life.
It appears the Finance Minister is on the right track. Unless investment is revived in the consumers durable market and jobs created,the economy will not grow. But care should be taken in expanding credit such that fresh NPAs are not created. NPAs and Bad Debts are like Subsidy. The FM's suggestion on Cash Accepting is laudable and long over due. It will be a fillip to Savings.
Given loans for Consumer Durables is Good. & Loans to Housing Sector is very bad and worst ideas, which was NDAs Govt ideas. This has made living miserable , with greedy owners raising the rents every year
I hope they also take care of their fiduciary obligations to the
people who have deposited money in their banks and would not blindly
grant loans to the airlines and governement agencies merely because
they are powerful and government owned unless their loans could pass
the rigorous test of banks or with an apaproprate government
guarantee. Some of them may be emboldened to write to the Finance
Secretary or RBI Governor –just as what a former chairman of IA did
which has come out in the media recently –so that when things become
darker in the banking sector or the financail sector generally they
could atleast save their jobs. Fuller report of the meet and the
media’s analytical comments and editorial pieces are awatiede in the
next few days.
It is difficult to digest the information that the reduction of EMI
from 1766 to 1725 and then to 1699 increased the car purchases from 400
to 700 and 1200 compared to the financial power of the people who
purchase cars. Perhaps this may be due to other factors.Be that as it
may, rescheduling farm loans and the already restructured loans to
Kingfisher airlines –even the latter restructured loans have become
already NPAs are a burning problem of the banking sector and this
aspect does not seem to have been discussed in the current meet.
Obviously this is not the opportune political time for the FM to talk
to the bank chairman about their increasing NPAs but surely in the
interests of the common man who deposits his hard earned money in the
banks would expect the FM to caution the banks on the increased level
of NPAs. The report says that bank chairmen were candid on explaining
their difficulties in getting repayment from some government agencies.
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