The Hindu Business Line : ‘PSBs unlikely to raise lending rates’

Meeting PSB honchos: The Union Finance Minister, Mr P. Chidambaram, flanked by Chairmen and Managing Directors (from left) Mr M.B.N. Rao (Canara Bank), Mr P.K. Gupta (United Bank of India), and Mr T.S. Narayanasami (Bank of India), prior to a meeting in the Capital on Thursday. —

Our Bureau

New Delhi, May 1

The Union Finance Minister, Mr P. Chidambaram, on Thursday said that he did not expect public sector banks (PSBs) to hike lending rates in the “reasonable future”, because of the increase in the cash reserve ratio (CRR) by 75 basis points by the RBI in the last fortnight.

“By and large, banks have welcomed the stance of the RBI in the latest monetary policy statement. They are quite happy that only CRR has been hiked and policy rates have been untouched. They do not expect the CRR hike to impact interest rates. Going forward, in the reasonable future, I do not expect any increase in interest rates by PSBs,” Mr Chidambaram told reporters after a meeting with the chief executives of PSBs here today.

Derivative products

At the meeting, the Finance Minister also asked the PSBs to review their portfolio on derivatives and ensure that their clients understand the “exotic” derivative products, before they are sold to them.

“He was keen that there be no mis-selling of exotic derivative products to companies. The whole focus was on exotics and not on vanilla products that banks anyway offer,” a banker said. Indications are that the RBI would come up with more guidelines on the issue of derivatives.

Mr Chidambaram also said that the housing loan category could expect higher credit flow without impacting interest rates in the wake of the RBI’s move to lower risk weight for home loans up to Rs 30 lakh.

Conservative estimates

Bank credit to the housing sector during 2007-08 stood at Rs 2,51,688 crore up to February 15, 2008, compared with Rs 2,24,758 crore during the same period in the previous year. Home loans to individuals grew 16.44 per cent to Rs 1,48,489 crore during 2007-08 compared with Rs 1,27,322 crore in previous year.

On the RBI estimate that, going forward, deposits will grow by 17 per cent and advances will grow by 20 per cent, Mr Chidambaram said “17 and 20 appear to be slightly conservative estimates, but 17 and 20 are satisfactory growth rates for 2008-09.”

The Finance Minister also said that he had emphasised that banks must concentrate on debt swap and take over money lenders’ loans to farmers and swap it for bank loan. “While there are no targets set, I have said that each branch of each bank must attempt to swap some money lenders’ loan for a bank loan and extinguish money lenders’ loans. This has to be done in every rural branch and every semi-urban branch, which is the principal instrument for farm loans,” he said.

Organic farming

The Finance Minister also asked the PSBs to use the services of SMERA, credit rating agency promoted by SIDBI and some banks. The Finance Minister emphasised that PSBs must lend to organic farming.

“Organic farming must make big strides in this country. There is a subsidy scheme from the Government for production of organic inputs. We have told banks to take advantage of the scheme and lend to the producers of organic inputs as well as farmers engaged in organic farming,” he said.

The RBI had, in the last fortnight, announced hike in the CRR in three phases i.e from 7.5 per cent to 7.75 per cent effective from April 26, from 7.75 per cent to 8 per cent effective from May 10 and from 8 per cent to 8.25 per cent effective from May 24. This is expected to mop up roughly Rs 27,000 crore of liquidity in the system.

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