Govt., India Inc. urge banks to provide cheaper loans

With India's inflation rate hovering at a near-record low of 0.31 percent, India's Prime Minister Manmohan Singh has taken the leading role in urging banks to provide cheaper loans.

"With ample liquidity and low inflation, there is scope perhaps for a further moderation in interest rates. Domestic credit flow for productive needs has to be definitely maintained at reasonable cost," Singh said.

"While public sector banks have reduced the prime lending rates in the last three months between 150 and 200 basis points (bps), other scheduled commercial banks are yet to respond in equal measure," he said.

Singh is not alone in favoring lower interest rates.

Last week, Cabinet Secretary K.M. Chandrasekhar held a meeting with top bankers to review the credit situation and urged the latter to ease interest rates further.

"We are in a situation where all of us have to work together and we have to see to what extent we can bring it (interest rate) down together," Chandrasekhar had said, adding that state-run banks are anticipating a credit growth rate of 24 percent in the current year that would help revive a slowing economy.

Though the government cannot force the banks "to do anything," yet, "all of us have to work together and they (banks) have to see to what extent they can pare interest rates still further," he said.

India Inc. has expressed similar concerns.

According to Venu Srinivasan, president of Confederation of Indian Industry (CII), given the current weakness in real economic data and the decline in inflation, "lending rates should have fallen much faster."

Agrees CII director-general Chandrajit Banerjee. According to Banerjee, the banks need to step up lending, especially in some sectors that are facing a shortage of loans. "The PSU (public sector unit) banks have indicated that they would take a call on the interest rates soon," he said.

Federation of Indian Chambers of Commerce and Industry (FICCI) president Harsh Pati Singhania said lending rates should ideally be in single-digit.

"If you are talking about a virtually zero inflation regime and you look at the interest rate, the effective cost today for a large corporate is between 11 percent and 12 percent, and is almost 15 percent or even more for the small and medium enterprises. Whereas everywhere else in the world, the real interest rates are at 3-5 percent," Singhania said.

According to Singhania, the beneficial effects of low inflation rate are yet to be enjoyed by the common man.

"What is particularly worrisome is that given the present inflation rate and the interest rates being charged by banks, the real rate of interest in the economy is at double digit levels," Singhania said.

"The Reserve Bank of India (RBI) (must) further ease the monetary policy to aid the industrial sector. Further, in view of the evolving situation the banks must shed their conservative stance with regard to lending to corporates and consumers. The banks must lower the lending rates to single digit levels if economic activity is to be stimulated. In fact the RBI and the government should embolden and incentivize the banks to direct resources for productive purposes," he said.

"Unless we are able to bring it (cost of borrowing) down, we can't expect to see the growth that we want to. It is for the banks to see how are they going to do that," Singhania said, adding that once state-run banks lower lending rates in coming months by 1-1.5 percent and bring it down to the going rates existing two years ago, it would automatically bring pressure on private banks to reduce their rates.

To inject liquidity into the market, the RBI has lowered the repurchase rate (repo) by 4 percentage points (or 400 bps) since early October to 5 percent and the cash reserve ratio (CRR), or the proportion of deposits banks must set aside as cash, by an equal amount to 5 percent. The reverse repurchase rate (reverse repo) has also been lowered by 2.5 percentage points over the same period to 3.50 percent.

While state-run banks such as State Bank of India, Punjab National Bank (PNB) and Canara Bank have indicated that they are considering a revision of their prime lending rates by at least 100 bps to bring them down to 10.5-12 percent from the current range of 11.5-13 percent, private sector commercial banks have been slow in reducing lending rates, citing increased risk aversion and high deposit costs.