Public and private sector banks are to effect a "greater" cut in interest rate in the coming days after Finance Minister Arun Jaitley today did some plain speaking asking them why they failed to transmit the benefit of 0.75 per cent reduction by RBI since January.
Keen to boost economic growth by making available cheaper capital, he met chief executives of public sector and private sector banks separately and conveyed government's disquiet over the lack of enthusiasm on the part of lenders. "The Finance Minister asked the CEOs of both the public and private banks to effect a corresponding rate cut of 75 basis points in response to RBI rate cut of same basis points since January," an official statement said.
"All banks unanimously expressed that in a period of 2 to 3 months, greater transmission of lower rates could be seen," it said. In an unusual move, top private ICICI, HDFC and Axis were called for discussions with the Finance Minister immediately after his meeting with PSU heads. Jaitley himself told reporters later that, "Some part of it (rate cut) have been passed on to customers, while some banks have not passed on. I feel over the next few days ... some of the bankers felt that over the next few weeks, they would be in a position to work out greater cuts."
In the meeting, he asked the bank chiefs as to why the system effected a rate cut of only 25 basis points against 75 basis point effected by RBI since January. Some of the banks, he said, have expressed their inability to pass on the rate cuts on account of problems with their respective balance sheets and higher rates on small savings schemes.
The statement said the CMDs said that until the cost of funds/deposits for the banks, as reflected in the re-pricing of their liability book at the new rate comes down, and liquidity levels at the new lower costs are tested, full transmission would not be viable. However, Jaitley said "the environment was optimistic. Since the movement in the banking sector appears to be for the better, this gives up a further hope of a greater recovery as far as economy is concerned."
A number of banks, including the largest public sector lender SBI, have cut their minimum lending rates after RBI reduced its policy rates by 0.25 per cent on June 2. At the meeting, Minister of State for Finance Jayant Sinha suggested that banks could sell off their non-core assets, apparently for raising capital. Jaitley promised more capital infusion into public sector banks, saying there's "merit" in their demand for more funds over and above what was provided in the Budget. "Banks have made a strong case for additional capital... And over the next few months, this is something the government is going to seriously look at," Jaitley said after meeting heads of PSU banks here. "...I do believe it's a case which has merit (attention)," he said.
The government has earmarked Rs 7,940 crore in the Budget for recapitalisation of PSU banks for the current fiscal. As regards bad loans, Jaitley said NPAs have come down in the January-March quarter and hoped that the situation would improve further with pick up in economy and higher public spending, especially in infrastructure sector projects.
"In quarter ending March 2015, NPAs had come down from 5.64 per cent to 5.2 per cent. One quarter does not indicate a pattern. So I would wait for some more time before realising what the pattern is. Banks are themselves of the assessment that it would take them 2-3 quarters to reach a somewhat more greater comfort level," he said.
The increase in NPAs is due to some infrastructure projects, slowdown in recovery in the global economy and continuing uncertainty in the global markets leading to lower growth rate of credit, because of which NPA as percentage of total credit has gone up, it said. "In addition, the stringent provisioning norms further reduce both future credit flow and profitability of banks. The PSBs continue to be under stress on account of their past lending," it said.
It emerged in the meeting that a sector by sector approach is necessary for NPA solutions and while companies needed promoter change, others needed greater equity, it said. Systematic steps towards improvement of asset quality were expected from the banks and the RBI, Government Departments and the financial institutions should collectively examine solutions that work, so as to de-bottleneck those critical projects of economic value, the statement said.
On projects stalled for want of funds, Jaitley said the Financial Services Secretary will prepare a list of such projects and try to resolve the issue. "Both the Secretary and if necessary at my level, we will be calling for a meeting of the representatives of the state governments, those projects and concerned departments, over the next few days and try to resolve the issues," he said.
Observing that the economy is recovering from the serious challenges it has faced in past few years, Jaitley said, "We can take some satisfaction of the fact that even though international agencies are rating us as perhaps the fastest growing among emerging economies, but our own level of ambition is higher". He said the basic fiscal data looks good and the economy is on a roadmap for much higher growth. "Government, in terms of policy initiatives, in terms of expediting the execution of stalled projects, will continue to play a very important role. Government spending in infrastructure has increased," Jaitley said. As regards rainfall, Jaitley said: "We are keeping our fingers crossed as far as the monsoon is concerned. We are in the midst of monsoon".
Two social sector security schemes -- Jan Suraksha Bima and Jeevan Jyoti Bima -- Jaitley said 10.17 crore policies have been sold in a month's time. As many as 2.53 crore people subscribed to Jeevan Jyoti Bima and 7.57 crore people to Jan Suraksha Bima as on June, 10. Around 2.12 lakh people joined Atal Pension Yojana between May 9 to June 10.
The Finance Minister cautioned both the banks and the insurance companies that a robust claim settlement process should be put in place so that the claimants get their benefits speedily in case of any mishap. He asked the insurance companies to carry out widespread awareness generation campaigns in this regard to sensitise the people on claim procedures.