In a letter to chairmen and managing directors of public sector banks, the finance ministry has asked state-run banks not to increase the Equated Monthly Installment (EMI), in order to provide some relief to the borrowers since interest rates have risen sharply. The ministry has suggested that instead of increasing the EMI amount, banks should consider increasing the tenure of the housing loans and car loan, among others.

"The finance ministry is of the view that since the economy is heading for slowdown, and at a time when inflation is high, banks need to be cautious while increasing interest rates," said the chairman and managing director of a mid-sized public sector bank, who has received the letter from the department of financial services of the finance ministry.

Banks have increased their base rate by nearly 300 basis points over the last one year in response to policy rate rises by the Reserve Bank of India (RBI). The apex bank had raised policy rates 11 times in the last 16 months, including two 50 basis point rise in the past three months to clamp on inflation and inflationary expectations.

The central bank move had raised concerns on the asset quality of banks, as an increase in EMIs would exert pressure on the capacity of individuals to service their loans. Borrowers who had taken loans on a floating rate basis, could be affected. Stretching the tenure would give borrowers more time to repay and avoid default.

Indian banks were already facing the issue of rising non-performing assets (NPAs). Finance Minister Pranab Mukherjee had raised concerns on the asset quality of banks.

Public sector banks reported a higher increase in NPAs in the first quarter of the current financial year, compared to private sector peers, partly due to fresh slippages and partly because of migrating to an automated NPA recognition system.

According to the latest RBI data, personal loan dues was around Rs 7,00,000 crore as on June 17, up 17.3 per cent compared to the year-ago period. These include home loans, car loans, education loans and advances given against fixed deposits, shares and bonds.