"We have advised the banks to look at the base rate," Chidambaram told a news conference. "In my view, reduction of the base rate will be a powerful booster, it will be a powerful stimulus to credit growth."
"I have impressed upon the banks the need to cut base rates. The Reserve Bank of India has cut policy rates by 125 basis points. Some part of this must be passed on to the borrowers."
Shortly after the meeting, Bank of India obliged by cutting its base rate by 25 basis points to 10% and it is likely that more state-run banks will follow, except State Bank of India, whose base rate is 9.7%.
Chidambaram said the bank chiefs had assured him that they would review their base rates by the end of July and take decision on cutting them. He said banks had been reluctant to cut base rates due to higher provisioning norms and increase in cost of funds. RBI has cut policy rates by 75 basis points this year so far, but banks have been slow to pass on the benefit of lower rates to borrowers.
The base rate is the minimum rate of interest that a bank is allowed to charge from its customers. Unless mandated by the government, RBI rule stipulates that no bank can offer loans at a rate lower than the base rate to any customer. The finance minister also said banks have been asked to concentrate on the top 30 performing as well as top 30 non-performing accounts. He said 30 top non-performing accounts make up for a large chunk of bad loans and banks have been asked to take action in cases of "willful default."
The finance minister also said state run banks and regional rural banks would open nearly 10,000 branches this year to widen the financial inclusion net and they would hire over 50,000 people. Chidambaram and his team of officials examined the credit and deposit growth of banks and reviewed the progress for sectors such as agriculture, medium and small enterprises, housing, education and minority communities.
"There is good credit demand from a few sectors -agriculture, small and medium enterprises and retail loans," the finance minister said. "Overall there seems to be some pick up in credit demand, the picture will be clear at the end of second quarter," he said and added that commercial real estate residential sector and non-conventional energy segment had shown robust credit demand
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