Finance Minister P Chidambaram urged state-run banks on Wednesday to lend money at cheaper rates as he looks to stimulate consumer demand, the main driver of a sluggish economy that has been pulled down by high inflation and interest rates.
The Reserve Bank of India (RBI) has cut repo rate, the rate at which it lends money to banks, by 75 basis points since January this year, but most banks have not lowered lending rates.
"We have advised the banks to look at the base rate," Chidambaram told reporters after meeting the heads of state-run banks. "In my view, reduction of the base rate will be a powerful booster, will be a powerful stimulus to the credit growth."
India's economy grew at a decade low of 5 percent in the last fiscal year ending March.
Each bank was free to take its own decision, Chidambaram stressed. State-run banks, which operate with a considerable degree of autonomy from the finance ministry, account for 75 percent of bank loans.
Banks have been worried that a sharp cut in lending rates could affect their profit margins in the absence of strong domestic demand and impact on bank deposits. The average base lending rate of Indian banks is around 10 percent.
Chidambaram said the heads of the state banks had assured him during Wednesday's meeting that they would review their base lending rates by month end.Chidambaram also said state-run banks were expected to open 10,000 more branches in the current financial year.
Currently, more than 40 percent of the 1.2 billion population is not covered by the banking system. Creating more branches would allow Indians, particularly those in rural areas, to get credit at a cheaper rate. Many now have to rely on money-lenders who charge up to 30 percent interest rates.
The increase in depositors will also allow banks to expand their business and lend to the corporate sector.
However, India's largest public sector bank State Bank of India responded swiftly, saying its rate was already low and reducing it further was not an option.
SBI Chairman Pratip Chaudhuri said the guidance to cut rate does not apply to his bank as its base rate is at 9.7%, the lowest among all state-run banks.
Bank of India, however, obliged and reduced its base rate by a quarter point on July 3 to 10%.