The Government’s plan of unveiling a ‘funding for lending’ scheme allowing State-owned banks to offer consumer and auto loans at reduced interest rates during the ongoing festival season may not turn out to be a blockbuster after all, as the banks would be left with very little elbow room to offer such bonanza offers owing to the fact that the net impact of the scheme would lead to the cost of funds (CoF) of PSU banks falling short by 0.1 per cent.
According to sources privy to the developments on this front, the impact assessment of the scheme conducted internally within the Government has revealed that the COF of all State-owned banks - despite `14,000 crore fund infusion to be done in them by the Government - will fall short by 0.1 per cent.
The CoF of public sector banks in FY13 stood at 6.27 per cent (as per RBI’s report titled ‘A Profile of Banks 2012-13’) and according to sources in the know, if the ‘funding for lending’ scheme is introduced, then their CoF may come down to 6.17 per cent.
Banks set up their CoF through various sources like bonds, deposit rates or through equity. On all these instruments, banks have to pay interest, therefore once the ambitious scheme comes into effect, the CoF is likely to fall short by 0.1 per cent, sources said.
Also as the base rates of banks are based on CoF, therefore, if this falls short then it will not give much room to PSU banks to offer attractive interest rates, because as per RBI guidelines, State-owned banks cannot offer loans at rates below their base rates.
Though the Government has announced that it will infuse `14,000 crore in PSU banks, allowing them to lend at attractive rates in the festival season, sources pointed out that this move may also not prevent the CoF of these banks to fall short by 0.1 per cent.
Analysts too feel that the proposed ‘funding for lending’ scheme may not help banks to lend at cheaper rates. According to Ashok Agarwal, Head Escorts Securities, “Cheaper loans do not depend on liquidity alone. CoF is also an important factor and if the CoF is high, banks will not be able to provide loans at reduced rates. Without deposits growing, infusing `14,000 crore would not have any major effect.”
Krunal Dayma, MD, First Step Capital, too ,feels that the move will not have any substantial impact on interest rates. “Infusion would slightly improve the liquidity situation of the banks but we do not feel that they would make any drastic reductions in the lending rates. They might think of marginally increasing the deposit rates to attract more customers. At most we feel some banks might reduce interest rates not more than 25 basis points,” he added.
last month, the Finance Ministry had indicated that it is evaluating a scheme launched by the Bank of England where funding to banks is given at lower rates. The Bank of England launched the ‘Funding for lending Scheme’ in 2012, providing incentives for banks and building societies to boost their lending.