Finance minister P Chidambaram on Thursday announced that capital infusion into public sector banks (PSBs) would be enhanced “sufficiently” from the budgeted R14,000 crore. The move is aimed at boosting consumption demand by enabling banks to provide cheaper loans to a clutch of sectors like two wheelers and consumer durables. Bankers said the additional capital would help cut cost of funds but added that they would wait for the details before committing any lowering of rates.
The in-principle decision to bolster bank capital, taken at a meeting between the minister and the RBI governor Raghuram Rajan earlier in the day, is also expected to boost capacity addition and industrial production, both languishing at present.
What prompted the concerted move by the government and RBI is the fact that private consumption growth fell an annual 1.6%, a new low, to R8,50,767 crore in the first quarter of FY14. Worse still, it dropped 1.9% in the three months through June from R8,66,854 crore in the previous quarter.
Two-wheeler makers welcomed the government’s move to boost consumer demand, coming right as the festive season begins with the Navratras on October 5. The expectation is that bike volumes will see a strong rise on the back of such sentiment-boosting measures. Sunil Kant Munjal, joint MD at Hero MotoCorp said it was a good and helpful move. “It is clear that the economy has suffered in recent times. Consumers want to purchase new bikes and scooters, but have been constrained due to high interest rates and inflation,” he said.
SK Jain, CMD, Syndicate Bank, said: “Capital infusion will bring down our cost of funds, but beyond that, we do not completely understand what this enhanced capital means. The budgeted capital infusion of R14,000 crore will itself bring down the cost of funds and may impact lending rates by 0.1% or so.”
According to M Narendra, CMD, Indian Overseas Bank, the new announcement could mean things like a separate base rate for retail customers. “But RBI or the finance ministry have to come out with a clear guideline as the current statement by itself does not mean much.”
Analysts were cautious, though, saying it remained to be seen whether banks would indeed lower rates for these segments.
Anis Chakravarty, senior director, Deloitte in India, said, “The question now is whether the interest rates to be offered by banks would be attractive enough to boost demand as banks and the government are hoping