Govt's cheap loan plan can have adverse effect: Chakrabarty

The RBI Deputy Governor says that if the interest rates go up investors will suffer

Even as government plans to prop up demand through lower rates of interest for auto and consumer loans, senior-most RBI Deputy Governor K C Chakrabarty on Saturday said this can have an adverse impact on their asset quality as "no one can force" lenders to selectively cut rates.

"You cannot lure the people (to buy goods) by lowering interest rates. If interest rate goes up, then they will suffer. If they have the requirement of the asset then only they will pay back," he told reporters on the sidelines of a conference.

"It is not a very prudent measure to increase consumption by lowering interest rates. If the rate goes up it will become NPA," he told students of a leading business school here earlier, alluding to the US sub-prime crisis wherein a lot of delinquencies were observed in mortgage loans which ultimately led to global credit crisis of 2008-09.

Asked if it is impractical to implement such a scheme, the Deputy Governor answered in the affirmative, saying there is no such 'scheme' as yet.

Chakrabarty, known for his candid views, sought to know if banks have the financial might to do such financing given the fact that their credit-to-deposit ratio is hovering at a high 78 per cent.

When told the scheme involves higher capital infusion by the Government, Chakrabarty countered by asking if there are sufficient resources available to carry out the move. "How much (will the Government put in)? If the Government has so much money, then no problem."

With a view to stimulate demand, the Government is working with RBI to prod state-run banks to lend at lower rates by increasing capital infusion. The aim is to prop up consumer durables and two-wheeler financing, which in turn will lead to better manufacturing outputs.

Finance Minister P Chidambaram had budgeted Rs 14,000 crore for recapitalising banks this fiscal and had said eligible banks would get the money by September.

Under the new plan, state-run banks lending at lower rates will be compensated by additional capital from the government, over and above the budgeted amount.