'Fall in interest rates to boost production'

The government feels the reduction in interest rates on housing and automobile loans by public sector banks (PSBs) would lead to a pick-up in manufacturing activity. In recent weeks, of the 27 state-run banks, 19 have cut interest rates on automobile loans, while 13 have slashed rates on housing loans. Most banks have either reduced or waived the processing fee on such loans.

“Banks and industry have come together to offer lower rates to customers for housing loans, car loans and other consumption loans. It is expected this would create substantial demand for the manufacturing sector in the near term, as well as in the long term,” said a finance ministry official. Industrial production recorded a recovery in August, increasing 2.7 per cent, after seeing stagnation, as well as a decline, in the previous months. An increase in factory output at a time when inflation stands at 7.8 per cent would give some cushion to the Reserve Bank of India to cut rates at its monetary policy review on October 30 to support growth, which slid to 5.2 per cent for the quarter ended June.

 

At a meeting with the heads of PSBs in August, Finance Minister P Chidambaram had asked them to ensure EMIs (equated monthly instalments) were affordable for consumers so that they could buy consumer durables, two wheelers and cars to keep the manufacturing engine running. “The middle class is complaining about increasing EMIs and the stretching payment cycle. The middle class, which consumes consumer durables, is postponing purchases, and that is not good for the industry,” he had said.

Banks have cut interest rates by 0.10-200 basis points. Most banks have offered discounts as a festive bonanza till the end of this year. The ministry official said more banks were likely to lower interest rates in the next few days.

While Allahabad Bank has reduced the rates on housing loans by up to 200 basis points, Bank of Baroda has offered a concession of 175 basis points on automobile loans. Banks such as Corporation Bank are offering additional concessions if customers avail of housing and automobile loans together.

Other offers from banks include waiver of prepayment charges, concession on buying gold coins