FM to PSU banks:Ensure adequate retail credit

Finance Minister P Chidambaram today prodded public sector banks to lend more to housing and consumer durable borrowers at affordable cost to thwart the negative impact on the economy due to the slowdown in credit growth.

While some banks, including State Bank of India, have already responded by cutting prime lending rates, other public sector lenders are likely to cut lending rates by February 20. It is expected that banks are likely to lower both deposit and lending rates by 25-50 basis points. Prime lending rates are in the range of 12-14%.

"The slowdown in credit growth has affected the housing and consumer durables sector. If it (credit) slows down too much, it will affect the economy," Chidambaram said after chairing a pre-budget meeting with public sector bank chiefs here.

Housing loan growth has declined to 20% in April-November 2007 from 35% in the same period last year. Loans for consumer durables have declined 4.4% in the period under review from a growth of 11.2% in the year-ago period.

Chidambaram said banks have been advised to look at the loan requirements of home and consumer durable consumers. "There is a feeling that adequate credit is not flowing to these sectors. The government has sensitised banks to the demand of the consuming public," he said.

Updated at 1330 hrs: Bankers are expecting a a further decline in interest rates due to ample liquidity in the system.

"With ample liquidity in the banking system, pressure on rates have eased," M B N Rao, chairman, Canara Bank, said, adding with the revision of prime lending rate (PLR), the interest rates for home and car loans, besides loans for small and medium sector and consumer goods, would also come down.

Talking to reporters on the sidelines of a meeting public sector bankers had with Finance Minister P Chidambaram, Rao said the banking industry was faced with a peculiar situation - high growth in deposit rates and decline in credit growth.

On a year-on-year basis, deposits grew by 29.5% till January 25 as against 23.5% last year. At the same, advances witnessed a growth of 22.6% as compared to 29.8% in the same period, said Rao, who is also the chairman of Indian Banks' Association.

Rao said there is about Rs 2,33,000 crore liquidity in the system.
Investments in securities have gone up to 30% as against 6.8% last year, he added.

State Bank of India and Canara Bank announced a reduction in PLR by 25 basis points yesterday. (PTI)