When festival season arrives, banks become hyperactive on retail loans. A regular annual exercise, it appears no different this time with major public sector banks such as SBI, Corporation Bank, IOB, Oriental Bank of Commerce and Punjab National Bank announcing “festival offers” of sharp cuts in lending rates for automobile, consumer durables and even housing loans.
Yet, there are two things that are different this time around. First, there is a demand slump in the economy. And second, the Reserve Bank of India has spoiled the party by banning zero-interest loans on consumer durables purchase. A sense of gloom has overtaken key industries such as automobile and consumer durables, which usually use the festival months to perk up their sales. This anxiety forced Finance Minister P. Chidambaram to announce that banks would offer cheaper loans to stimulate demand for two-wheelers, cars, and consumer durables. Significantly, Mr. Chidambaram’s hint to banks came after a meeting he had with the RBI Governor Raghuram Rajan. He also indicated that banks would be provided extra capital to execute his `pump-priming plan’.
Festivals are occasions for people to celebrate by spending, nay investing, in utility items such as TVs, two-wheelers et al. Such ‘investments’ bring joy across the family. The special festival rate cuts by banks will go a long way to cheer up consumers. Automobiles and consumer durables have often proved key drivers for the demand growth. Any effort to boost these is bound to have a multiplier effect on the economy. Given this, the special rate cuts are welcome, as they are an inevitable necessity at the present juncture.
The rate cuts this season, however, have raised some pertinent questions. Are banks doing it of their own volition? Or, have they been forced to do so under diktat from North Block? How is the RBI viewing this? If it turns out that banks are indeed acting under pressure from the government, this little incursion into monetary policy domain by political bosses is bound to have wider ramification for the economic management. Can the end, of driving up demand in the economy, justify the means even if the circumstances are extraordinary?