Cheap loans for two-wheelers, consumer durables likely soon

Public sector lenders may soon have an incentive to cut interest rates for two-wheeler and other consumer durable loans after the government decided to "significantly enhance" the amount of funds it plans to infuse into state-run banks to stimulate loan growth in select sectors. Capital infusion helps banks to lend more.

The decision was taken at a meeting between finance minister P. Chidambaram and new Reserve Bank governor Raghuram Rajan. A reduction in interest rates is likely to drive demand in the festive season and will also benefit lenders, who have been under pressure to hike rates after the central bank surprisingly raised repo rate last month.

"While this will bring relief to the consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," the finance ministry said in a statement.

For the current fiscal, the government had decided to inject Rs 14,000 crore in state-run banks as part of the recapitalization process. The government infuses funds in to public sector lenders because rising bad loans lead to higher provisioning and also because banks have to meet capital adequacy norms (like Tier I ratio).

The issue of credit growth in different sectors was also discussed at the meeting. At the end of September 2013, growth of gross bank credit stood at about 18 per cent year-on-year.

"However, credit growth is sluggish in some sectors leading to the conclusion that demand in these sectors remains subdued," the finance ministry said.

The RBI is scheduled to announce its second quarter policy review on October 29. In its mid-quarter review of policy review in September, the central bank had unexpectedly hike repo rate by 0.25 per cent, stunning analysts.