Finance minister urged state-run banks to increase lending for consumer durables on Saturday, saying this would help boost the manufacturing sector which has been caught up in the slowdown of the economy.

"Consumers must be encouraged to buy consumer durables," Palaniappan Chidambaram said after a meeting with chairmen of public-sector banks. "I think the point has been well taken by the banks."

Industrial output in Asia's third largest economy contracted for the third time in four months in June, dragged down by a deep dip in manufacturing, as the economy faces its worst slowdown in almost a decade.

Manufacturing, which constitutes about 76 percent of industrial production, shrank an annual 3.2 percent in June from a year earlier.

"We advised the banks to focus on sectors which deserve credit and which are crying for credit," Chidambaram said. "I think it is important that consumption of durables is supported to a great extent."

Government-owned lenders account for 70 percent of the market in India but their lending decisions are not always driven by commercial considerations.

Most banks have either maintained or reduced their base lending rates only marginally despite a steeper-than-expected 50 basis point repo rate cut in April.

Chidambaram, who took up his third stint as finance minister on July 31, has promised to revive the economic growth by taking measures in collaboration with the central bank.

Bankers said the finance minister advised them to lower interest rates on consumer durables that will help domestic demand pick up and investment in the manufacturing sector.

"Yes, he advised the banks to consider reducing interest rates for consumer durables," Pratip Chaudhuri, CMD of State Bank of India, India's biggest lender, told reporters.

Chaudhuri said his bank had already reduced interest rates from 11.75 percent to 10.75 percent on some consumer durables.

India's interest rates are among the highest in major economies and the slowdown has renewed calls for the Reserve Bank of India (RBI) to lower them at a September 17 policy meeting.

Car sales in India rose in an annual 6.7 percent in July, below the industry estimates as high interest rates and a tax rise stunted demand.

"Once we get the investment engine started, I think many of our problems can be solved," the finance minister said.