Govt asks banks to give loans to small businesses at lower rates

Tuesday 26th May 2020 16:40 EDT
 
 

The government is pushing public sector banks to provide additional working capital to small businesses at 7.5% interest under the loan guarantee scheme that proposes to provide up to £30 billion, while also asking them to ensure that senior citizens earn higher returns on their fixed deposits. While paring deposit rates - to ensure that all borrowers benefit from the lower rate regime - bankers have been asked to ensure widespread implementation of the Pradhan Mantri Vaya Vandana Yojana, which has been extended by three years up to March 2023. Under the scheme, senior citizens will be paid 7.4 % interest during the current financial year with rate to be reset next year.

With the Reserve Bank of India repeatedly reducing rates, State Bank of India has reduced its peak fixed deposit rate to 5.7% for funds parked for 5-10 years. In case of senior citizens, the bank is paying 6.5% a year. The message was conveyed to the bank chiefs during a meeting convened by Finance Minister Nirmala Sitharaman with implementation of the Covid package being the key focus to ensure that cash-strapped small businesses can access funds, and at lower cost.

Currently, small businesses are borrowing at 11-12% from state-run lenders. Last week, the government had cleared an emergency facility for business enterprises with a turnover of up to £ 10 million and outstanding loans of up to £2.5 million to get additional 20% working capital through a government guarantee with interest rate capped at 9.25%. Sitharaman has asked bankers to go all out to ensure that all eligible borrowers benefit from it.

Banking sources said that lenders were told that they should also slash lending rates to ensure that the benefits of a reduction in the RBI’s key policy rates are passed on to borrowers. Last week the RBI had reduced repo rate by another 40 basis points. This will mean that state-run lenders will be lowering rates on all loans in the coming months as they adjust their deposit rates.

“Basically, the government wants public sector banks to lend at 7.5% although it may not be possible for all of them. But they will try and work out the rates in a way that they can lend around the indicative rate,” a banking source said.


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