Thursday, January 1, 2009

New Package of Government of India to Revive the Indian Economy from Recession

On 16.12.2008, the Indian Bankers Association held a meeting in which it was decided that the rate of interest on loan taken would be slashed. At the same time, rates of interest were also lowered for small & medium term business loans. However private banks like HDFC, ICICI did not specify anything with regard to lowering of interest rates. Experts are of the opinion that they too will soon adopt the policy of nationalized banks.

The Government of India, to revive the economy, has taken a number of decisions to increase the flow of money in the economy. The price of petroleum has been reduced, a stimulus package of Rs 30,000 Crore of Rupees has also been declared by the Government of India. Even after all these, the Export Sector & Housing Sector got due attention from the RBI, which declared Rs 9,000 Crore package for these sectors. Amidst these, the Repo Rate was lowered by the RBI.That was done when RBI started bargaining with the banks with regard to lowering of interest rate. The final shape was obtained in the meeting of the Indian Bankers Association on 16.12.2008.

At the end of the meeting, the Chairman of SBI, Mr. O.P.Bhatta said, the nationalized banks will charge interest on Housing Loan @ 8.5% p.a. up to a loan of Rs 5,00,000 & would charge 9.25 % interest p.a. on loans between Rs 5,00,000 to Rs 20,00,000.Presently on an average the current rate of interest on loan is more than 10%. The new rate of interest will come into effect from 16.12.2008. Thus from 16.12. 2008 to 30.06.2009,whoever take housing loan, will have to pay interest at the above-mentioned rate. Bhatta further added that the revised rate will apply only to the new home loan takers & that the rate will remain fixed for the coming 5 years. After the fifth year, judging the market scenario, the loan takers can convert their loans into fixed or floating terms. Loan processing fee & prepayment penalty are also waived. Along with it the loan takers will also get free life insurance policy. Even the initial percentage of the amount required to be arranged by the loaners for Project Finance, has been reduced. It has now been decided that upto a project loan of Rs 5,00,000,the loaners are required to arrange 10 % of the project loan & between Rs 5,00,000 to Rs 20,00,000 project loan, they are required to arrange 15%. Till 16.12.2008, the margin fixed by the banks was 25%.

To revive the small & medium industries, Bhatta has talked about the decision to reduce the rate of interest by 100 basis point i.e. by 1%. To provide employment opportunities, the banks have decided to expand their business activities & appoint new employees (staffs). LIC & Nationalized banks, jointly have decided to create new employment opportunities to the tune of 45,000, the bank sources said.

The Finance Ministry stated that on account of the new package the burden of Rs 15,000 to Rs 20,000 Crores would ultimately fall on the shoulders of the nationalized banks. Naturally the banks will not be interested in further slashing of the interest rates. The Real Estate, it seems is not interested in the new package. They feel that in Metros it is not possible to get a home within Rs 20,00,000. Hence the loan takers of these Metros will fall outside this package. As a result, the demand for Real Estate during recession and the decision to increase the inflow of cash will remain unfulfilled. But the Finance Ministry is not accepting this theory. They feel that even during recession, the Real Estate price is bound to fall.

The Labour Minister Mr. Oscar Fernandez stated that during August 2008 to October 2008, 65,000 employees have lost their jobs on account of recession. So to create employment opportunities the Government now relies heavily on public sector undertakings.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)