Government's festival bonanza for banks

Banks may cut lending rates as govt offers additional funds to enable them to finance auto, consumer goods purchases

The Government on Thursday decided to enhance capital infusion in public sector banks. The fund infusion will be over and above `14,000 crore that has already been provisioned in the Budget. 

However, the quantum of the enhanced infusion was not immediately disclosed by the government.

The decision to enhance the equity infusion in PSU banks came after  an hour-long meeting Reserve Bank of India governor Raghuram Rajan had with Finance Minister P Chidambaram and Economic Affairs Secretary Arvind Mayaram to deliberate on ways to revive the economy. Credit growth in different sectors was also taken up in the meeting.

The proposed equity enhancement has been done so that banks can lend in select sectors including auto and real estate that have both posted negative growth due to lack of demand. The additional fund infusion would help in combating slowdown and boost consumer demand ahead of the festive season.

A Finance Ministry statement said, “This amount (`14,000 crore provided for capital infusion in PSU banks in the Budget) will be enhanced sufficiently. The additional capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two-wheeler, consumer durables, etc at lower rates in order to stimulate demand.”

The government statement further said, “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 latest industrial output data reveals that the output of the consumer durables sector declined by 9.3 per cent in July, from a growth of 0.8 per cent in the same period last year. The segment saw a 12 per cent decline in output in April-July compared with growth of 6.1 per cent.

Consumer durables, a reflection of demand for manufactured products, have all been showing de-growth. Also two-wheeler sales recorded a flat growth of 0.72% in April-August period current fiscal, as against a growth of 6.8% in the same period last year.

The decision to enhance additional capital infusion comes ahead of the central bank’s board meeting on Friday in Raipur. The RBI is scheduled to announce its second quarter policy review on October 29.