Relax interest rates by 2%: ASSOCHAM

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has urged the Finance Minister to urgently direct commercial banks to relax lending rates by at least 2% in a bid to inspire corporates to increase credit off take from them.


According to information received by the ASSOCHAM, corporates have started devising alternate means to access liquidity to support their diversification plans to channels like Qualified Institutional Placements (QIP), Private Equity (PE), Venture Capital (VC), Mutual Funds (MFs) and foreign capital in absence of the fact that commercial banks are refusing to adhere to softer lending regime.


The cost of funds in Indian economy is much more expensive even now than anywhere in world, despite huge liquidity available with the system. This has also adversely impacted exporters, who have to compete with neighbouring countries, where cost of funds and other sops are much more attractive than at home, feels the ASSOCHAM.


In an SoS sent to Finance Minister, Mr. Pranab Mukherjee, the ASSOCHAM has argued that despite the fact commercial banks are flushed with funds, credit off take has not been happening as intended and therefore, there is a strong case to reduce lending rates by at least 2%.


In a statement, President ASSOCHAM, Dr. Swati Piramal pointed out that growth in deposit rates has gone up by about 22% up to October end, as against their credit off take of around 9% up to the corresponding period, which has hardly kept pace with growing deposit rates. Commercial banks’ lending rates vary at 12-15% as of now.


The ASSOCHAM Chief further pointed out that since lending rates continue to be on higher plane, Indian corporates have found alternate means to access credit at cheaper and reasonable rates to fund their expansion plans. The instruments on which corporates are turning their reliability to raise resources as compared to commercial banks include QIP, PE, VC, MFs and foreign capital etc.


This is due to the reason that processes and procedures for raising funds in above identified instruments are virtually cumbersome less and lending rates there are much more reasonable. These channels have put up stiff challenge for commercial banks and until interest rates are brought down in them, whatever access liquidity they have acquired due to growing deposit rates and other factors, the money will stagnate with the system without being use to Indian industry.


Dr. Piramal also said that commercial banks are being avoided by domestic players as a good number of them are offloading the promoters equity by roping public participation in their entities. This is another channel that the corproates have discovered to raise money.


Thus, it is in the interest of commercial banks that they relax lending rates to avoid accumulation of liquidity with them. Still other reason as to how money and liquidity keeps accumulating with the commercial banks is because their excessive deposits and incremental credit is parked with government securities at a rate of return of around 3.25% in the form of repo rate and mutual funds. Rs.1,50,000 crores of money of commercial banks is parked with RBI in the form of repo rate and in government securities, mutual funds, bank’s investments exceed Rs.1 lakh crore.


These accumulated funds have limited income unless lent and such funds can be flushed out provided there is a taker for them. Thus, the ASSOCHAM has advised the Finance Minister to immediately issue directives so that commercial banks reduce interest rates as suggested by at least 2% which will also be in line with the monetary policy rates relaxed by RBI.