Loan rates, which have continued to rise for over a year now, are likely to see some moderation, with the Cabinet approving the promulgation of an Ordinance to amend the Banking Regulation Act, 1949, which will give the Reserve Bank of India the flexibility to set the statutory liquidity ratio for banks.

 

Under current laws, banks are required to maintain at least 25 per cent of the deposits under SLR by investing in government securities, which no longer provide attractive returns.

 

"The RBI has been given the flexibility to go below the SLR. If it decides (to do so), it will increase liquidity," Finance Minister P Chidambaram told reporters after a meeting of the Cabinet.

 

The reduction in the SLR will release more funds to cash-starved banks to lend more to productive sectors. Deposits are growing by 20 per cent while credit is growing by over 30 per cent due to the robust performance of the economy.

 

Oriental Bank of Commerce Chairman and Managing Director K N Prithviraj said: "When there is so much demand for credit, I do not think interest rates will come down automatically. If there is a fall in demand and reduction in deposits rates, then it could have an impact on lending rates."

 

Punjab National Bank General Manager U S Bhargava said lending rates were likely to come down in the medium term, but not immediately.

 

In other decisions, the Cabinet referred the proposed pharmaceuticals policy to a group of ministers. It approved the amendment of the Drug and Cosmetics Act, 1940, which will facilitate upgrade of the national drug regulator, bring uniformity in licensing and improve the quality of drugs.

 

The Cabinet also gave its approval for providing a special incentives package for setting up semiconductor fabrication units and other micro and nano technology manufacturing units in the country.

 

"The threshold of incentives will be decided by the Cabinet secretary in consultation with the Prime Minister's Office," P R Dasmunsi, information and broadcasting minister, told reporters.

 

He added that the special incentive package would be available up to March 31, 2010.

 

The Cabinet has also given the green light for setting up a Central Drugs Authority of India, modeled on the lines of the US Food and Drugs Administration.

 

The body will function as an autonomous organisation under the health ministry and will be in charge of issuing drug manufacturing licences for the entire country.

 

The Cabinet Committee on Economic Affairs has approved the setting up of the 412 Mw Rampur Hydro-Electric Project in Himachal Pradesh, to be executed by Satluj Jal Vidyut Nigam Ltd at an estimated cost of Rs 2047.03 crore (Rs 20.47 billion).