Mumbai: Reserve Bank of India governor Raghuram Rajan on Thursday strongly disapproved the practice of providing farm loan waiver and interest subvention schemes by various state governments.
He said such moves would distort the pricing of credit and disrupt the credit flow in the financial system.
Addressing a micro finance conclave organised by Nabard and Sidbi on Thursday, Dr Rajan said that the government should instead focus on alternative policies like direct benefit transfer and restructuring of loans to help distressed farmers.
Andhra Pradesh and Telangana governments have declared loan waivers for farmers. While the Telangana government has given the mandated 25 per cent of the written off loan amount to the banks, Andhra Pradesh has not done it so far.
The RBI governor said that the farm loan waiver significantly damages the flow of credit and it’s benefits are often enjoyed by wrong people. “We have seen this happen in states where effectively a loan waiver disrupts credit flows and makes the recipients temporarily better off, but worse off in the long term. A blanket loan waiver does significant damage and is usually acquired by the wrong people,” he added.
Dr Rajan also highlighted the need to move away from interest subventions to direct benefit transfers. “If you want to incentivise a particular activity, for example to the small and marginal farmers, give them direct transfers and let them use them in whichever way they want. But do not force them to borrow to get the benefit. To my mind, broad based interest subventions distorts the price of credit and lead to its misuse,” he said.
RBI to invite applications for small banks shortly
RBI governor Raghuram Rajan said applications from interested entities will be sought for setting up of small and payment banks after final guidelines were issued by the end of this month.
He said the new small bank license would offer an opportunity for successful microfinance institutions to migratetowards a banking licen-se without abandoning their core business.
According to him, even supermarket chains can apply for this license.
