The Hindu Business Line : Banks asked to tap more low-cost funds

1001st branch: The Union Minister for Finance, Mr P. Chidambaram (right), and Mr S Sambamurthy, Chairman and Managing Director, Corporation Bank, at the inauguration of the bank’s 1001st branch in Bangalore on Friday. –

Our Bureau

Bangalore, Aug. 1 The Union Finance Minister, Mr. P Chidambaram, has appealed to public sector banks to mitigate the impact of high interest rates on borrowers by focusing on low cost deposits.

Mr Chidambaram made this appeal while inaugurating the public sector Corporation Bank’s 1,000th and 1,001st branches. He said, “This is a difficult year for the economy.” He identified high oil prices and rising interest rates as some of the major obstacles for the economy.

Enough funds

He said, “Public sector banks must find ways to mitigate the burden of high interest rates.” He suggested banks shift focus to low cost resources. He said, “There is enough money in the system, both in the rural and urban areas. These Low cost deposits must be mobilised.” The banks, he said, need to tap the funds through current and savings account (CASA) deposits for containing the burden of high lending rates.

Banks, he said, needed to look at CASA ratios of at least 40 per cent of the overall deposit mix. Presently CASA comprises only about 30 per cent of the banks’ gross deposits. Some banks, such as Corporation Bank, have CASA ratios as high as 34 per cent. He also suggested that banks resort to correspondent banking models and widen usage of technology for expanding business.

He, however, said that the current regime of high interest rates were unlikely to last long. “It will start coming down in a six months or a year,” he added.

Referring to financial inclusion, the Finance Minister said that economic growth would be sustainable if it was inclusive. Since the banking sector, “was the heart of the economy”, Mr Chidambaram said the Government paid close attention to the banking sector.

Farm credit

The focus was to ensure that the farm sector credits were completely institutionalised. He said that banks need to swap money lender loans of farmers with the bank credit to ensure farm security. He said that the outstanding farm credit in 2004 was Rs 86,000 crore. This year, Mr. Chidambaram said, farm credit was likely to reach Rs 3 lakh crore.

Earlier, Karnataka’s Minister for Water Resources, Mr Basavaraj Bommai, demanded that the State Government be compensated for extending farm loans. He said the Government had provided Rs 1,700 crore in the budget for waiver of farm loans in 2007.

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