Reserve Bank of India Governor Raghuram Rajan on Monday warned that interest subventions and loan waiver schemes can distort the price of credit and are not healthy for the financial system.
Addressing a banking conclave organised jointly by industry body FICCI and Indian Banks’ Association, Rajan said interest subvention provided by the Government creates distortion by changing the price of credit.
“Loan waivers lead to misuse (of such schemes)…it hurts borrowers and disrupts the credit culture,” he said.
The central bank chief expressed concern that loan waivers and subvention for short-term agriculture loans haven’t helped in prompt repayment.
“The biggest need in agriculture is long-term money and farmers don’t get long-term loans because short-term loans are subsidised (by the Government),” Rajan said.
The Government introduced the interest subvention (of 3 per cent) scheme in 2006-07 for short-term crop loans up to ₹3 lakh. Under the scheme, agriculture loans are provided by banks at 7 per cent. Further, an additional interest subvention of 3 per cent is given to farmers who repay the loans in time, making the effective rate of interest 4 per cent.
Agriculture loans as on March 2014 totalled ₹779,200 crore, of which, ₹34,000 crore have turned bad, the RBI’s annual report showed.
Bankers have raised concerns on the loan waiver scheme proposed by the Andhra Pradesh and Telangana Chief Ministers saying the credit discipline would be undermined and they would default on agriculture loans in the future.
Earlier too, Rajan had warned against the “moral hazard” involved in such loan waiver promises.
Priority sector lendingRajan said why some sectors under the so-called priority sector lending should get easier credit should be looked at.
“For example, we subsidise student loans for study abroad. Now, are students studying abroad most needy from the perspective of the country?” he asked.
The priority sector lending requirement currently is at a minimum of 40 per cent, including sectors such as agriculture, education, rural housing, micro and small enterprises.