Rajan flays interest subsidy, loan waivers

Criticising interest subsidy schemes and loan waivers, RBI Governor Raghuram Rajan today said they are prone to misuse by borrowers, including farmers, and suggested a rate ceiling for loans by 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.
Andhra Pradesh and Telangana governments have declared loan waivers for 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.

"Waiving loans does widespread damage to the system and damages the credit culture. A loan waiver disrupts the credit flows and makes the recipients temporary better off but in the long term worse off," Rajan said.
On the interest subvention schemes for farmers and tiny sectors, he said: "To my mind any broad-based interest subvention distorts the price of credit and leads to misuse. Again and again we see that distorted prices lead to the wrong kind of investments. If you incentivise short-term loans you don't get long-term investment, but only short-term credit."

He also flagging concerns over the over-leverage that farmers take by way of availing of multiple loans and get leveraged up to five-times. The Governor complemented the Nabard for stopping this practice and said the central bank itself is looking at ending this market disruptive convention.

"People are borrowing five-times against the same crop of land because crop loan are cheap and they can go out and get it...But essentially they are misusing the subsidy in the system. Therefore, RBI endorses Nabard bid to stop multiple lending. In fact, we would like to join you in trying to find various ways of stopping the over-leveraging happening."
He asked banks to track the overall lending to individuals so that a certain element of discipline can be brought in both for the financial institutions as well as borrowers.
"Track the overall lending to individuals so that they don't over lent, and also keep track of individuals, so that they don't play game of one institutions against another... Also, it avoids excess leverage.