Arun Jaitley says economy recovering from challenges of last few years, asks banks to cut rates

Union Finance Minister Arun Jaitley

New Delhi, June 12: Union Finance Minister Arun Jaitley on Friday said the economy is now recovering from the serious challenges it has faced in the last few years.

“The economy is recovering from the serious challenges it has faced in last few years, basic fiscal data looks good. Retail credit has picked up, corporate credit is still to pick up,” Jaitley said at a press briefing here.

The Finance Minister, who met the heads of PSU banks, said he had discussed the state of banks with respect to the state of the economy.

Jaitley said: “We discussed the state of banks with respect to the state of the economy. Social sector schemes were also discussed. The government will seriously look into bank recapitalisation over the next few months. We expect the banks to pass on RBI rate cuts in the coming months.”

The Finance Minister did some plain speaking asking them why they failed to transmit the benefit of 0.75 per cent reduction by RBI since January.

Keen to boost economic growth by making available cheaper capital, he met chief executives of public sector and private sector banks separately and conveyed government’s disquiet over the lack of enthusiasm on the part of lenders.

“The Finance Minister asked the CEOs of both the public and private banks to effect a corresponding rate cut of 75 basis points in response to RBI rate cut of same basis points since January,” an official statement said, adding “All banks unanimously expressed that in a period of 2 to 3 months, greater transmission of lower rates could be seen.”

In an unusual move, top private ICICI, HDFC and Axis were called for discussions with the Finance Minister immediately after his meeting with PSU heads.

Jaitley himself told reporters later that, “Some part of it (rate cut) have been passed on to customers, while some banks have not passed on. I feel over the next few days …some of the bankers felt that over the next few weeks, they would be in a position to work out greater cuts.”

In the meeting, he asked the bank chiefs as to why the system effected a rate cut of only 25 basis points against 75 basis point effected by RBI since January.

Some of the banks, he said, have expressed their inability to pass on the rate cuts on account of problems with their respective balance sheets and higher rates on small savings schemes.

The statement said the CMDs said that until the cost of funds/deposits for the banks, as reflected in the re-pricing of their liability book at the new rate comes down, and liquidity levels at the new lower costs are tested, full transmission would not be viable.

However, Jaitley said “the environment was optimistic. Since the movement in the banking sector appears to be for the better, this gives up a further hope of a greater recovery as far as economy is concerned.”

A number of banks, including the largest public sector lender SBI, have cut their minimum lending rates after RBI reduced its policy rates by 0.25 per cent on June 2.

At the meeting, Minister of State for Finance Jayant Sinha suggested that banks could sell off their non-core assets, apparently for raising capital.

Earlier, Chief economic adviser Arvind Subramanian had stated that growth was gaining momentum on the basis of spurt in indirect taxes collections.

The increase was spread across all the three categories – customs, central excise and service tax.

(With Agency Inputs)

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