The Reserve Bank of India (RBI) today (6th Dec’08) announced reduction in two benchmark interest rates- the repo and reverse repo- by 1% each to stimulate growth. The RBI governor D.Subbarao said, “We have talked to the Bankers and expect that the banks would respond to the measures by reducing lending and deposit rates.”
This step by RBI is in fact intended to make cheaper loans available for buying apartments, electronic gadgets and range of other home appliances to boost the most affected part of manufacturing sector in the economic downturn.
The RBI is also worried about the wanton rise in fixed deposit rates of banks, which even now are as high as 10.5% for short run and 9.5 to 10% for long run. It is a measured fact that if fixed deposit rates are high then by opposite reaction the lending rates are ought to be high.
The RBI also announced Rs. 7000 crores refinancing facility for the Small Industries Development Bank of India (SIDBI) to aid the small and medium enterprises. This refinance facility would be made available up to March-2010 at the repo rate of 6.5% interest. SIDBI would, in turn, disburse the amount to the target sector by direct lending as well as lending through non-banking finance companies and state financial corporations against the latter’s incremental loan and advances to the small and medium enterprises sector.
The apex bank has also relaxed the norms for non-performing assets (NPA) for viable enterprises whose loans are being restructured by the concerned banks, which in essence means that in the process of restructuring, the NPA would be treated as standard assets in the books of the bank.
On the flip side however, the Industry feels (as is their habit) that the stimulus provided by the RBI to boost housing and small & medium sector is inadequate and requires more stimulants.