Public sector bankers on Friday assured Finance Minister P Chidambaram that there would not be any interest rate hike this fiscal for loans raised by firms for productive purposes.
At the end of a marathon meeting with bank chiefs in Delhi, Chidambaram requested the bankers not to increase India Inc's production cost.
"I cannot direct you.... I can only make an appeal.... Do not dampen the investment climate.... Please keep the cost of production (for companies) unchanged for the time being," Chidambaram reportedly told bankers at the end of the meeting held at Vigyan Bhavan.
Indian Banks' Association chairman and head of State Bank of India AK Purwar assured the finance minister that banks would not hike rates for productive credit - loans for project financing and working capital requirements of corporations - till the end of the fiscal year.
The finance minister, however, did not seek any assurance from the bankers on interest rates on retail loans and short-term corporate loans. In other words, there can be a marginal rise in interest rates for retail and consumer credit as well as short-term corporate loans (raised for no specific purpose) over the next few months.
However, India Inc will not have to worry about the rising interest cost as bankers assured Chidambaram that they would not do anything that could affect business confidence.
"There is no liquidity strain, as over Rs 65,000 crore (Rs 650 billion) worth of funds have been locked in the Reserve Bank of India's market stabilisation scheme, which can be released into the system over the next few months. The finance minister has also assured us of using fiscal measures to contain inflation, if required," a banker who attended the meeting told Business Standard.
Bankers, however, discussed unhealthy competition in the industry and hinted at efforts to put an end to the practice. This means that short-term all-purpose corporate loans, which have been disbursed at wafer-thin margins, will now be costlier.
"This will not affect the investment climate as companies do not raise such loans for productive purposes," said a bank CEO.
Public sector banks account for about 75 per cent of the banking industry and hence corporates can heave a sigh of relief for the time being as their interest cost burden will not go up for 2005-06.
On other issues, Chidambaram told bankers to clean up their balance sheets of small stressed accounts of Rs 25,000 or less. Chidambaram asked them to settle all these accounts by December 2006.
Even though these assets account for less than 10 per cent of the total bad assets of the banking industry, in numbers they are more than 80 per cent of the total accounts.
"Handling millions of small accounts adds to the transaction cost. The minister wants us to settle all these accounts within a year," said a banker. This will help branch managers to chase bigger accounts to recover money.
Chidambaram even told them to clear small sticky accounts up to Rs 1 at the next stage after banks' books were free of small NPAs.
Bankers do not see major financial implications of this move as some of the accounts have already been written off. This means that even if they settle such accounts at massive discounts, recovery will add to their bottom lines.
However, clearing of small accounts will cut down banks' transaction cost. "So far, we could not do that for the fear of being pulled up by investigative agencies. Now, with this mandate, we can fast clear millions of smaller accounts," said the chairman of a large bank.
More from rediff