Early Diwali: State-run banks to get funds from government to provide cheaper loans

Published: 04 Oct, 2013


The Indian consumer is getting a Diwali bonus from the government - money that it hopes will ripple through the economy, having a benevolent effect right through the chain and imparting a much-needed stimulus to flagging growth.

The government didn't say how much the programme would cost. The targeted stimulus, plans for which were reported by ET on September 18, will see the money routed through state-run banks. The banks will in turn use it to provide cheaper loans to fund the purchase of televisions, refrigerators, motorcycles and scooters, and perhaps more items later.

The government hopes this selective stimulus will lead to a consumer boom and boost capacity addition, job creation and production, helping spur growth that slumped to a four-year low of 4.4% in the first quarter of the fiscal.

Finance minister P Chidambaram and Reserve Bank of India governor Raghuram Rajan met on Thursday to decide on the stimulus programme. Economic affairs secretary Arvind Mayaram was also present at the discussions.

The government will increase capital support to banks from the budgeted Rs 14,000 crore to help them lower interest rates on the category of goods identified.

"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. The additional amount of capital will enable banks to lend to borrowers in the selected sectors at lower rates in order to stimulate demand, the statement said.

Chidambaram will soon meet the heads of public sector banks to impress upon them the need to lower interest rates in sectors such as auto to boost demand and lift growth.

"Lower interest rates will depend on the lending capacity of banks. Banks will decide on sectors where lower rates will boost demand. I will meet bankers soon," Chidambaram said.

Experts said the measure won't undermine RBI's efforts to tame inflation. In his first monetary policy announcement since taking over, Rajan had unexpectedly raised the repo rate by 25 basis points as wholesale inflation climbed to a six-month high of 6.1% in August. A basis point is one-hundredth of a percentage point.

Source: Economics Times