The Hindu Business Line : Cheaper credit

With the State Bank of India and the ICICI Bank, together the largest lenders, dropping their interest rates on home and other retail loans — by 50-100 basis points and 50 basis points respectively — and even for SMEs, the Finance Minister’s hints to bank chiefs seem to have paid off. But the reduction in interest rates is restricted to the festive season alone. Much as North Block might want to take responsibility for easing the burden of high interest r ates on the small borrower keen to own a home or crank up his business, banks operate with different calculations. The festive offer would have been made regardless of the Finance Minister’s intervention; in the competitive market for personal loans that banks operate in, discounts are as much part of the business as flexible interest rates are in the bank credit framework.

As the Finance Minister once pointed out to a Member of Parliament who wanted enlightenment on the subject, the Reserve Bank of India has de-regulated interest rates and most banks, with their respective board approvals, fix charges for loans. For advances up to Rs 2 lakh, the Bank Prime Lending Rate (BPLR) works as the ceiling; but for most other loans the BPLR, which currently rules at 12.25-12.75 per cent for public sector banks and 12-16 per cent for private sector banks, is just a benchmark and practically irrelevant. To keep them away from the lure of usurious lending, the RBI in July this year advised banks to devise internal principles and procedures to restrict processing fees and other charges. When the SBI and other banks announced their recent festive cuts, they were simply following the RBI advisory.

Contrary to their public stance of hard times, most banks that follow aggressive market strategies have had a field day in loans and advances despite higher interest rates. While overall credit growth may have climbed down from its high of around 30 per cent, banks really have followed their business instincts choosing customers with ability to pay. Year-on-year variations in non-food bank credit to May 2007 show that large industry still gets the lion’s share; in the personal loans segment, credit cards (46 per cent), education (43 per cent) and consumer durables (26 per cent) still lead the way with housing trailing at 24 per cent. But the real winners for banks are the real estate loans in the services segment, with a twelve-month growth of 69 per cent. If the Finance Ministry wants interest rates to soften, and soften they should, it should address the RBI, not the banks; the spiral begins on Mint Road.

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