Banks to offer cheap loans to prompt customer demand

The government decided to improve capital infusion into the PSU banks to facilitate them to offer cheaper loans for auto and consumer durables to stimulate demand and fight slowdown.

Ahead of the festive season, the government on Thursday decided to improve capital infusion into the PSU banks over and above what was provided in the budget to facilitate them to widen more credit to auto and consumer durables to prompt demand and fight the worst slowdown in a decade ahead of the general elections.

This decision was taken at a meeting between Finance Minister P. Chidambaram, Reserve Bank of India Governor Raghuram Rajan and Economic Affairs Secretary Arvind Mayaram in New Delhi.

A statement issued by the finance ministry read “This amount (Rs 14,000 crore provided for capital infusion in Budget) will be improved adequately. The additional amount of capital will be provided to banks to allow them to loan to borrowers in selected sectors such as two-wheelers, consumer durables, etc at lower rates in order to encourage demand.”

It further said the added fund infusion would assist in fighting downtrend and improve output.

It added “While this will bring relief to consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production.”

As per the present industrial output data, the output of the consumer durables sector dropped by 9.3 percent in July, from a growth of 0.8 percent in the same month last year. The segment witnessed a 12 percent slump in output in April-July in comparison with growth of 6.1 percent.

Consumer durables, a sign of demand from manufactured products, include television, fridge, washing machine, etc.

The two-wheeler sales registered a flat growth of 0.72 percent in April-August period in the current fiscal year, compared to a growth of 6.8 percent in the parallel last year.

The meeting, which lasted for around an hour, examined credit growth in various sectors. However, the amount of added capital infusion was not revealed by the government.

The statement said that at the end of September 2013, growth of gross bank credit stood at about 18 percent Y-o-Y basis. Though, credit growth is lethargic in some sectors leading to conclusion that demand in this sector remains downcast.

The decision was announced ahead of the RBI’s board meeting on Friday, which is held at least once every quarter to examine key economic and monetary developments.

The board meet gains importance in the wake of economic growth falling to a four year low of 4.4 percent and current account deficit (CAD) at an inflated level of 4.9 percent in the April-June quarter.

While the government has been asserting on ways for incentivising growth, the RBI in its policy review last month had raised interest rates by 0.25 percent.

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