In a bid to induce consumer demand through availability of cheaper funds, Finance Minister P. Chidambaram, on Wednesday, exhorted public sector banks to review their minimum (base) lending rates and pass on the benefits of rate cuts by the Reserve Bank of India (RBI) to borrowers to boost investment and spur growth.
Till date, even as the RBI has gradually cut its short-term lending (repo) rate to the extent of 125 basis points since January last year, banks have largely been stingy in passing on the benefit and eased their own lending rates by paltry 30 basis points to consumers.
At a meeting with the public sector bank chiefs here, the Finance Minister did a ‘talking to’ as he had indicated earlier. Talking to reporters after the meeting with the bankers, Mr. Chidambaram said: “We have asked them [PSU banks] to take a look at their base rates. I have impressed upon the bankers, as the RBI has cut the policy rates by 125 basis points, ...some part of this must indeed be passed on to borrowers.”
While noting that the PSB chairmen have assured him of conducting a review of their Base Rate next month, and take appropriate decisions on easing interest rates on loans, Mr. Chidambaram said: “In my view, reduction in Base Rate would be a powerful booster to the economy, powerful stimulus to credit growth.”
The Finance Minister highlighted the fact that the variation in Base Rate among the state-owned banks was wide in that the Base Rate of the country’s largest lender State Bank of India (SBI) was 9.7 per cent while the average lending rate of others PSBs was 10.2 or 10.25 per cent.
Understandably, while the SBI chief noted that the bank’s lending rate was the lowest in the market and left not much room for a further cut, some others such as the Bank of India announced a reduction in rates by 25 basis points to 10 per cent with effect from July 8.
Higher provisioning norms
The general view among the bankers was that while their own cost of borrowing had gone up by 50 basis points, they were also constrained to pass on the benefit of rate cut on account of higher provisioning norms.
As a way out, just as in the case of income tax where the department has been going after non-filers and stop-filers of I-T returns, Mr. Chidambaram asked all banks to focus on the top 30 of their non-performing accounts, and take action recovery against wilful defaulters. “They are keeping a close watch on top 30 NPA accounts in each bank and action will be taken to recover especially when there is a case of wilful default,” he told journalists.
The banks, Mr. Chidambaram said, have informed during the meeting the top 30 NPA as well as performing accounts are reviewed monthly. “The top NPA accounts are reviewed every month and actions are taken,’’ he said while pointing out that the focus on top accounts would help the banks in improving their balance sheets.
Quality of assets
As for the asset quality of banks, the Finance Minister noted that there was improvement in the March quarter over the earlier three-month period. “There has been an improvement in the gross NPA ratio. There has been an improvement in every sector in terms of gross NPA. Therefore, as of March, 2013, compared to December, 2012, the asset quality has, in fact, improved. But you cannot look at it as one quarter, we will have to see at the end of the year,” he said.
However, while the deposit growth has been modest during 2012-13, the credit growth has been slow.
At the end of March 31 this year, PSB deposits grew 14.91 per cent over the previous fiscal while credit growth was at 15.62 per cent, down from 17.76 per cent in 2011-12. “There is good credit demand from a few sectors — agriculture, small and medium enterprises and retail loans,” he said.
Alongside, while there are signs of credit growth in the housing sector, especially in commercial real estate for residential purposes, on the infrastructure side, there are some signs of higher credit demand in road sector, non-conventional energy sector.
Mr. Chidambaram also pointed out that all PSBs are in compliance of Basel capital requirement norms. Except four banks — IDBI Bank, Indian Overseas Bank, Bank of Maharashtra and Dena Bank — all others have a CAR (Capital Adequacy Ratio) of eight per cent and more.
