With the festival season round the corner and the Government falling short of any room to cut interest rates, the Finance Ministry in tandem with the Reserve Bank of India (RBI) is looking at a way to facilitate cheaper home and auto loans at lower rates to the common man, in order to bring some cheer in the automobile and real estate sectors which have borne the brunt of the global slowdown.
The Finance Ministry is learnt to be in the process of evaluating a scheme launched by the Bank of England under which banks are given loans by it at lower rates.
According to official sources, the ministry along with RBI is mulling to launch a similar scheme where banks could get loans from the apex bank at 1% to 2% lower than the market rates and this could be passed on the consumers as cheaper home and auto loans.
The scheme tentatively titled ‘funding for lending’ may be announced by the RBI in its policy review scheduled for September 20, sources said.
RBI Governor Raghuram Rajan, for whom it will be his maiden policy review, had held discussions on Tuesday with Prime Minister Manmohan Singh and Finance Minister P Chidambaram on the macro-economic situation.
“The RBI has constant consultations with the Finance Ministry. This meeting was part of that. We discussed the whole gamut of issues,” Rajan had told reporters after meeting Chidambaram.
The Bank of England launched the Funding for lending Scheme in 2012, providing incentives for banks and building societies to boost their lending. Both the price and the quantity of funding provided are linked to their lending performance, according to the Bank of England website.
At its previous policy review in July, the RBI kept key interest rates unchanged on account of a weak rupee. The repo rate stands at 7.25 per cent, the reverse repo rate at 6.25 per cent and the cash reserve ratio (CRR) is at 4 per cent.
This time, the RBI’s options may be limited by the high rate of inflation and a volatile rupee. Wholesale prices in August climbed 6.1 per cent, the fastest pace in six months. The rupee, which depreciated to a record low of 68.85 against the dollar on August 28, has recovered some ground and closed yesterday at 63.37.
Industry has clamoured for a reduction, blaming the high interest rate regime for the slowdown. With the peak festival season around the corner, bankers are pressing for a cut in the CRR and policy rates to help boost demand for manufactured goods and revive sagging economic growth.
“We have recommended a cut in CRR, repo rate and asked the RBI not to restrict the MSF (marginal standing facility) to a particular number,” State Bank of India Chairman Pratip Chaudhuri had said earlier this week.