The government seems to be convinced that rural areas and labour intensive sectors hold the key to reviving the economy and is taking steps in the direction. It has asked banks to step up lending to small and medium industries in a bid to stimulate the economy.
External affairs minister Pranab Mukherjee, who also holds charge of the finance portfolio, told reporters after meeting with heads of PSU banks that in view of contracting global demand, the focus of the revival efforts has to shift to domestic demand and this would call for stimulating demand in rural areas and highly labour intensive sectors.
On their part, PSU banks on Monday assured the government of reducing interest rates.
Mukherjee said that the government must extend support to the development of those sections which immediately stimulate growth and throw up employment opportunities. Last week in its quarterly review of monetary policy, RBI held policy rates steady at the same time maintaining that banks have enough scope to cut rates further. It said, its measures since October have given enough scope to cut rates.
Finance secretary Arun Ramanathan said as with moderation of deposit rates, there is general expectation that interest rates would come down.
Analysts say the government also wants to spruce up retail demand as economic growth is falling with the slump in auto and real estate sales. The add that it will also ask banks to submit an assessment on credit given to the housing sector, small businesses and infrastructure firms.
According to a senior bank official banks need to address systemic issues such as small savings deposit and sub-PLR rates to cut deposit rates further. Meanwhile, some banks had pre-empted Mukherjee by cutting lending rates by 50 basis points last week.
Analysts say small savings schemes offer an 8 per cent interest-free rate of return. They add that banks will have to offer more more attractive rates to woo depositors.
Meanwhile credit flow has increased significantly following reductions by the central bank. According to finance ministry data between September last year and January this year, Rs1,01,000 crore was lent to borrowers mostly industries, which is higher 28 per cent over the Rs78,500 crore lent during the same period last year.