High Interest Rates To Affect Launch Of Infrastructure Projects

The Parliamentary standing committee on finance has expressed concern that the continuing high rate of interest being charged by public sector banks could affect the launch of infrastructure projects in the country.

The key issue for industry is whether any projects, especially infrastructure projects, will be viable at such high real interest rates, observed the committee in its report, which was tabled in the Lok Sabha recently.

The report points out that the refusal of banks to reduce their high interest rates despite the sops provided by the slack season credit policy would harm the domestic industrys prospects of becoming globally competitive.

 

Although most of the banks have fixed their prime lending rates at between 14 and 14.5 per cent annually, their effective interest rates remain in the range of 16 to 17 per cent, the committee members observed.

The committee doubts whether any of the public sector banks extend loans to even the best rated corporates at their prime lending rates, says the report.

Factors considered by banks while fixing interest rates on loans and advances include productivity and efficiency. Two common measures frequently studied by banks are the average business per employee and the level of non-performing assets in a particular firm.

The interest rate is also based on the average cost of acquisition of funds, which is determined mainly by interest offered on domestic term deposits.

The committee members noted that the reduction in the interest rate on deposits with maturity up to one year has led to an all round cut in deposit rates.

The slack season credit policy announced on April 15 had linked the deposit rate with the bank rate and prescribed that the rate of interest on deposits should not exceed the bank rate minus two per cent points per annum. Thus, the lowering of bank rate from 12 to 11 per cent means that banks cannot offer more than nine per cent interest on deposits with a maturity between 30 days and one year.

The committee members urged banks with low non-performing assets and high productivity and efficiency to take the lead in further reducing the rate of interest, keeping in view the viability of various projects especially those in the infrastructure sector in a competitive environment.

The committee said considerable potential exists for banks to further lower their interest rate while maintaining a reasonable level of profitability.