FM to ask banks to consider slashing interest rates

Karaikudi (TN), Nov 2 (PTI) Terming "as a right signal"
the Reserve Bank of India's (R.B.I.) latest policy package to
inject more liquidity in the system, Finance Minister P.
Chidambaram Sunday said he will ask the P.S.U. banks to
consider lowering lending rates.

In an exclusive interview to P.T.I., the Minister said he
would take the issue of interest rate cut "forward" during a
meeting with chairpersons of public sector banks in Delhi on
November four.

"I am happy with the policy package announced by the
R.B.I. When it announced its (peak season) policy on Oct 24,
the R.B.I. had promised swift action in case it is necessary
to infuse more liquidity.

"I am happy that the R.B.I. has responded swiftly," he
said in his reaction to yesterday's policy package announced
by the central bank.

In a slew of announcements, the R.B.I. had Saturday cut
the repo rate (the rate at which it lends to banks and is a
signal to banks to reduce their rates) 50 basis to 7.5 percent
and the cash reserve ratio (C.R.R.) by 100 basis points to 5.5
percent and the statutory liquidity ratio by 100 basis points
to infuse an additional Rs 85,000 crore into the system.

The central bank had already injected in October
additional liquidity of Rs 1,85,000 crore in the wake of
global financial crisis and depression in the U.S. that had
spread fears in India of a recession and brought in
volatility in the stock markets.

Chidambaram said the R.B.I.'s policy was also a signal to
the banks that they should now now consider lowering their
interest rates.

"When I meet the Chairmen of public sector banks on
November four I will take this matter forward," Chidambaram
said, adding that the R.B.I.'s latest package would greatly
benefit the industry and trade, especially the small and
medium enterprises.

The bankers had welcomed R.B.I.'s measures announced
yesterday, saying it was a signal for softening interest
rates, but refrained from committing an immediate cut in their
lending rates.

Industry chamber C.I.I. President K.V. Kamath, who is
also head of the country's largest private sector lender
I.C.I.C.I. Bank, had said that R.B.I.'s steps were "welcome
and concrete" but suggested that more liquidity was needed in
the system for ensuring lowering of commercial interest rates
by 3-4 percent.

Chidambaram said that the opening of an additional window
of 150 basis points (B.P.s) for providing liquidity to Mutual
Funds and Non-Banking Finance Companies (N.B.F.C.s) will
greatly benefit these two segments, which are an important
part of the financial system.

Asked whether the banks would now now reduce their
lending rates, the finance minister said "that is the signal".

To a question on the demand for a bail-out package for
M.F.s and N.B.F.C.s, whose loans were now now very costly,
Chidambaram said the banks can now now borrow from this
window at 7.5 percent.

"My view is that banks should not not expect to make very
large profits on lending to M.F.s and N.B.F.C.s. While I do
not not wish to indicate any particular rate, 300 basis points
above 7.5 per cent should be more than adequate for the banks.

The net interest margin (N.I.M.) of bankers above three
percent (300 basis points) should be adequate," he said.

K.C. Chakrabarty, Chairman and Managing Director of
Punjab National Bank, which had announced a 0.5 percent cut in
its peak lending rates a day before R.B.I.'s latest measures,
said, "We see single digit deposit rates soon... (we have)
already announced to cut peak deposit rate to 10 percent
beginning next month."

R.B.I.'s latest measures would bring the repo rate to 7.5
percent, while C.R.R. and S.L.R. would go down to 5.5 percent
and 24 percent respectively.

Commenting on R.B.I.'s move, I.C.I.C.I. Bank Joint
Managing Director Chanda Kochhar said, "It will release much
needed liquidity into the system and signals reduction in
rates," but added it was too early to say when this would get
translated into lowering of interest rates.

Bank of India C.M.D. T.S. Narayanasami said that it would
look at cutting deposit and lending rates, but it might take a
month for deposit rates to come down.

Private sector lender H.D.F.C. Bank, however, said that
it would not reduce its P.L.R. unless funding costs come down.

A day before Finance Minister's meeting with the P.S.U.
bankers on Tuesday, Prime Minister Manmohan Singh, along with
Chidambaram, is meeting the captains of Indian industry,
including Ratan Tata, Ambanis, Ruias, K.M. Birla and Nandan
Nilekani to explore ways for pushing the economic growth and
ensure that the target of 7-8 percent is met.

On its part, the Finance Ministry announced duty changes
to bolster and aviation and steel sectors just a day before
the R.B.I. package was announced.