Finance Minister P Chidambaram on Wednesday urged state-run banks to lend money at cheaper rates to boost consumer spending, the decline of which led to a decade-long economic slowdown.
The Reserve bank of India (RBI) had cut its repo rate in January by 75 basis points but most banks did shy away from following RBI's steps to lower lending rates.
"We have advised the banks to look at the base rates. While the base rate of State Bank of India (SBI) is 9.7 percent, the average of the other banks is 10.20-10.25 percent. In my view, reduction of the base rate will be a powerful booster, will be a powerful stimulus to the credit growth," Chidambaram said after a meeting with chairmen and managing directors of public sector banks (PSB) and financial institutions.
Chidambaram stressed that state-run banks were free to take a decision as they operate with certain autonomy. The PSBs assured him they will review their base rate this month and take a suitable decision on lowering it.
The FM had asked the PSBs to look into the issue last month, but not seeing his words converted to action, he met the heads of the banks personally on Wednesday.
According to Reuters, state-run banks account for 75 percent of bank loans. They are concerned about reducing their profit margins if there are sharp cuts in lending rates.
Among the state-owned banks, State Bank of India (SBI) ruled out on further reduction of interest rates saying it was already low, while Bank of India agreed and reduced its base rate by 25 base points.
Chidambaram added that the banks are expected to open 10,000 more branches during the current fiscal, a move which would create employment opportunities for 50,000 people. Besides expanding its operations, the centre is also planning to facilitate the direct cash transfer scheme for people under welfare programmes.
Chidambaram also stated that credit growth has been sluggish in 2012-13 and that deposit growth has not been impressive either.
In 2011-12, banks' deposits grew by 14.4 percent and increased only marginally by 14.91 percent by the end of the last financial year. Even credit growth in 2012-13 increased at 15.62 percent, which was lower than the 17.76 percent in 2011-12.