To counteract the economic slowdown, government wants to ensure that the banks and financial organizations have enough cash that they can lend forward at a reasonable cost. As a result it has extended the order of directing profitable public sector entities to park their surplus cash with the state-run banks.
Earlier in June 2008, the government has asked the PSUs to keep their excess funds with the state run banks in order to help these banks to deal with the loan waiver and farm loans schemes announced at that time.
Banks informed that it was expensive to raise capital for such schemes because they were borrowing at a high cost and at the same time they had to compete with their private peers and offer high interest rates to PSUs that had accounts with them.
But now as the slowdown is affecting the economy, the government has extended the order for another year. With the extended order, PSUs would renew their deposits with the same bank that will further enable banks to continue offering lower lending rates. It would also prompt banks to reduce the lending rates further as the cost of funds would remain low.
The profitable PSUs like ONGC, generation utility NTPC, equipment manufacturer BHEL, steelmaker SAIL and others in total have surplus cash more than Rs 100,000 crore.
Normally these PSUs park their cash in term deposits of a year or more with banks that offer highest interest rates through bidding. However these PSUs are likely to suffer a loss in additional income for another year with the extension of the order. The PSUs will not be able to secure higher rates through bidding.
The interest rates offered in the bidding is around 2% higher than the interest rates prevalent in the market.