Boosting demand: Banks to soon provide cheaper loans for bikes, fridges

Banks will offer cheaper loans to stimulate demand for scooters and motorcycles as well asconsumer durables such asTVs, refrigerators etc asFinance Minister P Chidambaram tries to pull the economy out of the worst slowdown in a decade ahead of national elections due by next May.

Banks will get additional capital to carry out the plan, the finance ministry said in a statement on Wednesday after a meeting between Chidambaram and new Reserve Bank of India (RBI) chief Raghuram Rajan.

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

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Chidambaram will now meet heads of public sector banks to impress upon them the need to lower interest rates in select sectors, including automobiles, to boost demand and revive sagging 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,” he was quoted as saying by the Business Standard.

The move comes at a time when persistently high inflation coupled with shrinking employment opportunities in a slowing economy have crimped consumer demand.

Growth in consumer spending slowed down to 1.6 percent year-on-year in the quarter through June from 4.3 percent a year earlier, dragging down economic growth for the quarter to a near four year low of 4.4 percent.

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

With the hike in repo rate, banks have hiked interest rates on auto loans and home loans. So how much of this benefit they will pass on to consumers remains to be seen.

The move is expected to boost the production of consumer durables items such as two-wheelers, refrigerators, washing machines and televisions, which has been hit by high interest rates and inflation. The sector has failed to register growth since last November.

In July, consumer durables output had dropped 9.3%, against a growth of 0.8% in the corresponding month in the previous year. The segment registered a 12% decline in output in the April-July period against a growth of 6.1% in the previous corresponding period.

Data from the Society of Indian Automobile Manufacturers showed that sales of scooters and motorcycles grew 0.72% between April and August from the year-ago period. During the same period, the passenger car and utility vehicles market declined 5.3%.

“It is a short-term measure and can help to boost demand for the consumer durables and auto sector,” said N.R. Bhanumurthy, an economist at National Institute of Public Finance and Policy (NIP), a Delhi-based think tank.

“CII welcomed the government’s move to enhance the amount of capital to be infused into public sector banks.

“Given the tight liquidity conditions in the banking sector, the move will provide a much-needed support to PSBs, which accounts for about 75% of the Indian banking sector assets, to expand their lending facilities to the key targeted sectors,” Chandrajit Banerjee, director-general of CII, was quopted as saying by Economic Times.

India’s worsening economic slowdown is a major worry for Prime Minister Manmohan Singh’s government as it seeks a third straight term in upcoming national elections.

Economic growth virtually halved in two years to 5 percent in the fiscal year that ended in this March - the lowest level in a decade - and some economists expect growth in 2013/14 to hit the lowest level since 1991/92.

That is nowhere near good enough for a country with India’s demographics. It has a population of 1.2 billion and a per capita income of around $1,000.

Singh’s government estimates the economy needs to be averaging 8 percent growth to generate jobs for the increasing numbers of youth joining the workforce.

The downturn has hurt the reputation of Singh, who was once hailed for unleashing the unprecedented economic boom of the past two decades. It has also allowed Narendra Modi-led opposition Bharatiya Janata Party (BJP) to gain momentum ahead of national elections.

With inputs from Reuters