After the Reserve Bank of India (RBI) jolted the common man by hiking repo rates which resulted in home and auto loans becoming dearer, the Government on Thursday chose to soothe sentiments ahead of the coming festival season, as it announced that public sector banks will provide cheaper loans for auto and consumer goods purchases with a view to stimulating demand.
Banks would lower lending rates as it was decided by the Centre to provide additional funds to the public sector banks to enable them to fund auto and consumer goods purchases.
The decision to increase the quantum of capital infusion to the banks was taken at a meeting between Finance Minister P Chidambaram, RBI Governor Raghuram Rajan and Economic Affairs Secretary Arvind Mayaram.
“This amount (`14,000 crore provided for capital infusion in Budget) will be enhanced sufficiently. The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sector such as two-wheeler, consumer durables, etc at lower rates in order to stimulate demand,” a statement issued by the Finance Ministry said.
Chidambaram said he would be meeting heads of PSU banks soon to impress upon them on the need to lower interest rates for select sectors.
According to the statement, the additional capital infusion into the PSU banks would help in combating slowdown and boost output. The quantum of additional capital infusion, however, was not disclosed by the Government.
“While this will bring relief to consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production,” it said.
Output of the consumer durables sector declined 9.3 per cent in July compared with growth of 0.8 per cent in the same month last year, the Ministry of Statistics and Programme Implementation said on September 12. The segment saw a 12 per cent decline in output in April-July compared with growth of 6.1 per cent a year earlier.
Production of consumer durables reflects demand for products such as TVs, fridges and washing machines.
Two-wheeler sales recorded 0.72 per cent growth in the April-August period as against 6.8 per cent a year earlier.The meeting, which lasted for over an hour, discussed credit growth in different sectors.
“At the end of September 2013, growth of gross bank credit stood at about 18 per cent Y-o-Y basis. However, credit growth is sluggish in some sectors leading to conclusion that demand in this sector remains subdued,” the statement said.
The decision to enhance additional capital infusion comes ahead of the central bank’s board meeting tomorrow in Raipur, which would be attended by Mayaram and Financial Services Secretary Rajiv Takru, among others.
The RBI board meets at least once every quarter to discuss key economic and financial developments. The four deputy governors are the official directors on the board and two government nominees. There are also 11 non-official directors on RBI board.
The board meet assumes significance in the wake of economic growth falling to a four year low of 4.4 per cent and current account deficit (CAD) at an elevated level of 4.9 per cent in the April-June quarter.
While the Government has been emphasising on measures for incentivising growth, the RBI in its policy review last month had hiked interest rates by 0.25 per cent.
The RBI is scheduled to announce its second quarter policy review on October 29.
Although Prime Minister Manmohan Singh and other government functionaries are expecting the growth to improve in the second half of this fiscal, Asian Development Bank in its recent report lowered India’s growth projection for 2013-14 to 4.7 per cent.The economic growth rate slipped to a decade’s low level of 5 per cent in 2012-13.