Finmin links recapitalisation of PSU banks to lower lending rates

The finance ministry propose to infuse more capital into public sector banks so as to enable increased lending to the automobile and consumer durables sectors at reduced rates and boost production and consumption.

The amount of capital to be infused could be substantially above the Rs14,000 crore provided for in the union budget for 2013-14.

The decision on what could amount to a mini quantitative easing (QE) of a different kind was announced at a meeting between finance minister P Chidambaram, RBI governor Raghuram Rajan and economic affairs secretary Arvind Mayaram in New Delhi on Thursday.

The finance ministry expects the additional amount of capital to enable banks lend to borrowers in select sectors at lower rates to stimulate demand and thereby give a boost to capacity addition, employment and production.

The move also comes after the central bank recently halted all zero EMI schemes for financing purchases of durable goods and a spike in interest rates led to a slackening of consumer lending, including vehicle financing.

The central government decided in principle to enhance the amount of capital to be infused into public sector banks (PSBs) fin the wake of a deceleration in credit flows to the various sectors of the economy, an official release said.

While gross bank credit expanded at about 18 per cent year-on-year as of end-September 2013, credit growth was sluggish in some sectors, pointing to subdued demand in these sectors, the finance ministry stated.

As per the latest industrial output data, the output of the consumer durables sector declined by 9.3 per cent in July, from a growth of 0.8 per cent in the same month last year. The segment saw a 12 per cent decline in output in April-July compared with growth of 6.1 per cent year-on-year.

Two-wheeler sales recorded a flat growth of 0.72 per cent in April-August period of the current fiscal, against a growth of 6.8 per cent in the corresponding period last year.

This is perhaps the first time that the government is linking recapitalization of banks with lowering of lending rates. It would also seem as arm-twisting of the RBI, which has so far refused to lower policy rates despite prodding by the government.

It is, however, not clear how actual lowering of interest rates will be implemented at the banks level without the government and RBI creating a separate window for subsidized loans for certain segments. The other option for the finance ministry is to instruct banks to cut rates for certain segments once they avail of the additional equity support.