Union Finance Minister P Chidambaram has asked public sector banks to go slow on disbursals of home and other consumption loans to help fight inflation.
The minister met the chairmen of state-owned banks in New Delhi on Thursday. Usha Thorat, deputy governor of the Reserve Bank of India, was also present at the meeting.
The banks were urged to reduce high-cost bulk deposits within three months to ease the upward pressure on interest rates.
Chidambaram conveyed the government's concerns about bank credit fuelling demand pressures and banks' race for garnering deposits at any cost, adding to interest rate pressures.
The chairman of a public sector bank, who attended the meeting, said, "The minister said 30 per cent year/-on-year growth in credit is not sustainable. Banks were asked to restrict their lending to the retail sector. In his view, the inflation was demand driven."
The banking sector's home loan portfolio has increased by about Rs 63,000 crore (Rs 630 billion) and other retail loans such as personal loans and credit card receivables portfolios by about Rs 46,000 crore (Rs 460 billion) in 2006-07.
The total increase in bank credit in 2006-07 was Rs 4,16,115 crore (Rs 4,161.15 billion), according to industry estimates.
Chidambaram said, "We have impressed upon them (Chairmen of PSBs) that they have to rebalance their portfolio so that adequate credit at correct prices is available to productive sectors."
The chairman of another PSB said the finance minister has asked banks to increase their CASA by about 3 percentage points in the next three months.
Chidambaram asked banks to join hands with India Infrastructure Finance Company to finance infrastructure projects. IIFC made a presentation on infrastructure financing during the meeting. IIFC has approved loans of Rs 8,810 crore (Rs 88.10 billion) to 47 projects in 2006-07.
The Indian Banks' Association has been asked to submit its recommendations on the instruments that banks would like to issue for raising long-term resources for infrastructure financing.