RBI against loan waiver scheme by state governments: report

Mumbai: Reserve Bank Governor, Raghuram Rajan expressed reservation over the loan waiver scheme by  various state governments and also suggested reasonable  interest rate ceiling on loans from micro finance lenders. 

"Repeated loan waivers by various state governments distorts credit pricing, thereby also disrupting the  credit market," he said at a function organised by Nabard.  Both Andhra Pradesh and Telangana governments have declared loan waivers for the farmers hit by cyclone Phailin last year. 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.  Banks have over Rs 1.3 lakh crore exposure to the farm sector in these two states. 

Rajan also underlined the need for reasonable interest rate ceiling for consumer protection.  "There should be a reasonable ceiling on interest rate on loans from microfinance lenders for consumer protection," he said. Following the October 2010 crisis in the then undivided Andhra Pradesh that crippled the MFI sector, an RBI-appointed  Malegam panel had suggested 26 per cent monthly cap on  interest rates for the sector. This cap was notified by the central bank in April 2012.  The crisis began after the state government banned recovery by any coercive means, following a string of alleged  suicides by micro-credit borrowers.