‘It is not a prudent measure to increase consumption by lowering interest rates’

Even as the government plans to prop up demand through lower rates of interest for auto and consumer loans, Reserve Bank of India (RBI) Deputy Governor K. C. Chakrabarty, on Saturday, said this could 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 U.S. 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 was impractical to implement such a scheme, the Deputy Governor answered in the affirmative, saying there was no such ‘scheme’ as yet.

Dr. Chakrabarty, known for his candid views, sought to know if banks had the financial might to do such financing given the fact that their credit-to-deposit ratio was hovering at a high 78 per cent.

When told the scheme involved higher capital infusion by the government, Dr. Chakrabarty countered by asking if there were 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 stimulating 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.

The move comes in the wake of economic growth falling to a four-year low of 4.4 per cent in the June quarter, and a slew of analysts pegging it below 5 per cent for the full fiscal.

The decision to cut rates selectively was taken following a high-level meeting between Mr. Chidambaram, RBI Governor Raghuram Rajan and Economic Affairs Secretary Arvind Mayaram earlier this week.

The Finance Minister will soon be meeting heads of state-run banks to impress upon them the need to lower interest rates on the select sectors.

While stressing that the limited money available with banks should be used for “productive purposes”, Dr. Chakrabarty said, “we have a problem of capital, the CD ratio is 78 per cent already, you cannot further force them to lend more, that is what I’m saying. But it is a bank’s decision.”

Asked what advice RBI would give to banks in this regard, Dr. Chakrabarty said, “our prudent advice is always be careful.”

Dr. Rajan had, on Friday, said the contours of the scheme were still being worked out. “I just want to emphasise that discussion is taking place on what can be done. Something will be announced as and when the scheme will be put together.”

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