Looks like the finance ministry’s move to encourage banks to give out cheap consumer loans, in return for greater capital, has done the trick.

According to a report in The Economic Times, soon after the government announced its ‘funding for lending’ scheme earlier this month, most state-run banks have slashed interest rates on consumer loans by up to 5 percentage points so as to attract more funds from the government.

State-run Punjab National Bank (PNB) is offering a discount of 5.75 percent on consumer loans, while Andhra Bank has given a 5.5 percent off on such loans.

Further, since most consumer loans come in the personal loans category, a large number of banks have done away with demanding collaterals for loans as in the case of vehicle and housing loans. Also, banks are no more seeking bills from customers who now only need to submit an undertaking which is kept as proof.

A decision on additional funding to such banks is likely to be taken on Tuesday when finance minister P Chidambaram will meet public sector bank (PSB) chiefs to take stock of their performance on boosting lending activity.

Earlier this month, the finance ministry had announced its decision to infuse additional capital in banks that provide cheap loans to customers over and above the capital of Rs 14,000 crore budgeted for the current fiscal.

Banks have been asked to submit information on their rate cut decisions to the finance ministry based on which the additional capital support will be provided to banks. “Lending done by banks will be a factor for capital infusion. We expect banks to lend around Rs 60,000 crore in the next quarter in retail loans, which will also include consumer loans,” a finance ministry official said.