Cheaper loans ahead of the festival season is good news for consumers as many of them have postponed purchase decisions in the wake of high borrowing costs as well as higher prices, which have increased further due to the sharp slide of the rupee against the dollar. It will come as a relief for companies who may be hit by RBI's recent decision to ban the so-called zero interest schemes. Already, there is de mand from the auto and real estate sectors to provide support amid sluggish sales.
This is the first time that the government is linking cheaper loans with recapitalization funds. For the past several months the government has been prodding RBI to cut rates but the central bank has refused to play ball. In fact, in the recent monetary policy review, RBI governor Raghuram Rajan stunned markets with an increase in policy rates. But how the decision will be implemented is not clear. For years, the government has been providing capital to increase the equity base of public sector banks as it has refused to pare its stake below 51%. Even this year, it had budgeted for providing additional capital of Rs 14,000 crore, which has now been "enhanced sufficiently", although the ministry did not disclose the additional funding that will be provided.
Unless the government and RBI create a separate window, subsidized loans for certain segments are not possible. The only other option for the finance ministry is to instruct banks to cut rates for certain segments once they avail of the additional equity support.Market players also pointed out that banks were fringe players in consumer durables financing, which was largely done by a handful of non-banking finance companies such as Bajaj Capital. Alternatively, individuals use credit cards for purchases, which are then converted into installments. The move by the finance ministry is, however, aimed at boosting demand in select pockets and putting the economy back on track, which has grown at its slowest pace in a decade.
"The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two wheelers, consumer durables etc, at lower rates in order to stimulate demand. While this will bring relief to the consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," the finance ministry said in a statement. The decision to boost capital was taken during a meeting between finance minister P Chidambaram, Rajan and economic affairs secretary Arvind Mayaram. Despite several attempts, Mayaram refused to answer queries. "The issue of credit growth in different sectors was discussed. At the end of September 2013, growth of gross bank credit stood at about 18%, year-on-year. However, credit growth is sluggish in some sectors leading to the conclusion that demand in these sectors remains subdued," the statement said.
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