A harried finance minister P Chidambaram facing elections in six-nine months amidst deeper economic gloom, today took an innovative way to banking—asking the banks his ministry owns to bring down their lending rates, to help him revive growth, as he nudgings of an unabashedly stubborn and bookish like a child Reserve Bank governor in the past has not yielded results.
The desperate move came as banks have been refusing to pass on the 125-basis points rate cut that the Reserve Bank had effected in recent months, which has finally seen growth slipping to a decadal low and not inflation, has asked the state run banks to review their minimum lending rates or base rates so as to bring the cost of borrowing down for consumers. In the name of fighting inflation, for which RBI governor Subbarao has been innovatively finding one excuse after another which at the last count was the seventh one in his five-year tenure, with monsoon being the latest addition, he easily succeeded in yanking down to near-record low levels—5 percent in FY13-even as inflation mocked at him continuously—retail inflation at 9.6 percent and wholesale inflation at 4.7 percent in May.
The Reserve Bank has reduced its key short-term lending rate (repo) by 1.25 percentage points since January 2012, but banks have passed on only 0.30 per cent to consumers. "We have asked them (PSU banks) to take a look at their base rates. I have impressed upon the bankers, as the RBI has cut the policy rates by 125 basis points, …some part of this must indeed be passed on to borrowers," Chidambaram told reporters after his meeting with heads of PSU banks. However, the largest lender State Bank was quick to pour cold water on the demand, saying it can’t do so as at 9.7 percent its base rate is the lowest, which is 45 bps lower that the nearest low rate. But another lender Bank of India followed suit with a 25 bps cut in base rate from July 8.
He said all the banks have assured that they would review their base rate this month and they will take appropriate decision on cutting the base rate. "In my view, reduction in base rate would be a powerful booster to the economy, powerful stimulus to credit growth," the Finance Minister said. Bankers said they are constrained to pass on the rate cut benefit because of higher provisioning norms as well as due to increase in their own borrowing cost by up to 0.5 percent.
Chidambaram said while base rate of SBI was 9.7 per cent, the average for other PSU banks is 10.2 or 10.25 per cent. Chidambaram further said all banks have been asked to focus on their top 30 non-performing accounts and take actionrecovery against the wilful defaulters.
"They are keeping a close watch on top 30 NPA accounts in each bank and action will be taken to recover especially when there is a case of willful default," he said. Chidambaram said banks have informed that top 30 NPA as well as performing accounts are reviewed monthly. "The top NPA accounts are reviewed every month and actions are taken," he said, adding that focus on top accounts would help banks improve balance sheet sharply. On asset quality of banks, he said it has improved in the March quarter over the previous three months. "There has been an improvement in the gross NPA ratio. There has been an improvement in every sector in terms of gross NPA. Therefore as of March 2013, compared to December 2012, the asset quality has, in fact, improved. But you cannot look at it as one quarter, we will have to see at the end of the year," he said.
The minister also said while deposit growth has been modest for the past fiscal, credit growth has been slow. In FY13, PSBs’ deposits grew 14.91 per cent, slightly higher than the 14.4 per cent recorded in the previous year, while credit grew 15.62, down from 17.76 per cent in 2011-12. "There is good credit demand from a few sectors –agriculture, small and medium enterprises and retail loans," the minister said.In housing, he said, there are signs of credit growth, especially in commercial real estate for residential purposes. On the infrastructure side, there are some signs of higher credit demand in road sector, non-conventional energy sector. He also said all PSU banks are compliant Basel capital requirement norms. He said that except for four public sector banks IDBI Bank, Indian Overseas Bank, Bank of Maharashtra and Dena Bank all other have capital adequacy ratio of 8 per cent and more.
Chidambaram also informed that public sector banks would be opening 8,000 new branches this year and hiring 50,000 employees. "This year public sector banks are expected to add 10,000 branches of which 2,000 are to be by regional rural banks. Correspondingly there will be recruitment. In fact, all the banks put together are expected to recruit some 50,000 persons in the current year," he said. The public sector banks had a sanctioned strength of about 8 lakh employees as on March 31, 2012. They hired around 63,000 in the last financial year. SBI alone recruited 20,000 clerical staff and 1,200 officer level employees. Other PSU banks hired 22,000 officers and 20,000 clerical staff.
There were 84,489 vacancies at various levels in the state-owned banks at the end of 2010-11. Seeking to improve manpower management in the public sector banks, the finance ministry recently said the 19 nationalised banks should have a total number of 442 GMs to oversee banking operations. Chidambaram further said he "impressed upon" banks to cooperate on restarting the stalled projects.“The 215 stalled projects which were identified was due to the effort of the banks…the special cell under the Cabinet Secretariat will get into the full steam in the next few days. I think they had taken a meeting yesterday with eight stalled projects. Today, I think they are taking a meeting with another 14 stalled projects. I have told banks to cooperate with the special cell," he said
