Loan waivers must be avoided by state governments as such a move in the advent of crisis distorts the price of credit and also leads to a deterioration of the credit culture, said RBI governor Raghuram Rajan.
After cyclone Phailin hit last year, the Andhra Pradesh and Telangana governments had announced loan waivers for farmers.
Rajan said that interest rate subsidies can lead to misuse and over leverage. Direct benefit transfer is a better option than blanket interest rate subsidies, Rajan said.
The governor said that microfinance institutions will have to live with interest rate ceilings as these are required to avoid monopolies. “For now it seems to me that despite microfinance companies saying it is harmful and I admit it is harmful, we have to live with it,” he said.