Fm Wants Lending Rates Lowered

Finance minister P Chidambaram has asked banks to reduce transaction costs to help lower lending rates and warned that the slow growth of credit was unacceptable.

At a meeting with the central board of directors of the Reserve Bank of India (RBI) in New Delhi yesterday, Chidambaram said there had been some softening of interest rates since October, but a further reduction of lending rates was desirable.

At present, high transaction costs are keeping lending rates high. This is because deposit rate expectations have been ratcheted up with non-banking finance companies offering attractive rates. The only option that banks have is to offer a high deposit rate, but cut transaction costs and, thereby, roll back lending rates.

 

Chidambaram said the annual inflation rate should be kept at 6 to 7 per cent to provide economic and political stability, the RBI said in a statement released here.

The finance minister hoped that the economic agents would respond favourably to the new initiatives in the budget so that a sustained growth rate of seven per cent can be achieved.

Some banks are willing to lend, others are not, the statement quoted Chidambaram as saying. Such slow growth of credit is simply unacceptable.

Bank credit increased by Rs 152 billion from April 1996 to January 1997, only half as much as in the same period last year. The finance minister has suggested that the Reserve Bank should encourage bankers to lend more actively.

Reserve Bank governor C Rangarajan has assured the government that measures necessary to accelerate the flow of credit to support growth in output will merit attention.

Chidambaram said the past fiscal year had been difficult for prices because of a drop in wheat production and an increase in the prices of state-controlled goods such as oil.

During the course of the meeting the RBI governor outlined the twin objectives of the central banks monetary policy.

They were: regulating the money supply to keep inflationary pressures under control, and providing adequate credit to support growth.

He said large inflows of foreign capital, which are being funnelled into Indian stock markets and into industrial projects, would complicate its task of keeping money supply growth at the target level of 16 per cent. Rangarajan also said that it would be necessary to ensure that the reserve money expansion after taking into account the net RBI credit to the government was consistent with the desired rate of monetary growth.

He also expressed satisfaction at the replacement of the system of ad hocs with that of the system of ways and means advances. According to Rangarajan, this will impart greater fiscal discipline and enhance the autonomy of the RBI in the conduct of monetary policy and regulation of monetary policy.